2009

State Tax Trends

An Overview of 2009 Tax
Changes and Spending Habits.

www.atr.org

2009 State Tax Trends: An Overview of 2009 Tax Changes and Spending Habits

Published by:
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722 12th Street, NW, Suite 400
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Phone: (202) 785-0266
Fax: (202) 785-0261
www.atr.org
Authored by Kelly William Cobb and Patrick Gleason
Americans for Tax Reform Foundation (ATRF) performs research and analysis in order to educate taxpayers on the true causes and effects of legislation
and regulatory affairs. ATRFs efforts inform debate, initiate conversation, and emphasize the importance of fundamental tax reform and spending
restraint. In turn, Americans for Tax Reform (ATR), a 501(c)4 nonprofit lobbying organization, uses this research and analysis to track initiatives beyond
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Table of Contents

Overspending Not Low Taxes Caused the 2009 State Budget Crunch ..........................2
Why did Revenues Fall So Hard This Time Around? ..............................................................3
Tax Changes in 2009 ............................................................................................................5
Higher-Income Earner and Small Business Taxes ........................................................5
Tobacco Taxes ............................................................................................................6
Alcohol Taxes ..............................................................................................................8
eTaxes ........................................................................................................................9
Bag Taxes ....................................................................................................................9
Challenges Ahead in 2010....................................................................................................10
Concluding Thoughts............................................................................................................11

Americans for Tax Reform Foundation

722 12th St. N.W., Fourth Floor
Washington, D.C. 20005

2009 STATE TAX TRENDS // AN OVERVIEW OF 2009 TAX CHANGES AND SPENDING HABITS

2009 State Tax Trends

An Overview of 2009 Tax Changes and Spending Habits
The 2009 legislative year saw states drowning in a combined
$215.5 billion of red ink through the next fiscal year. In the midst of
a national recession and a subsequent decline in tax collections,
lawmakers and governors resorted to tax hikes, spending cuts, and
taking on more debt. However, much less emphasis was placed on
structural reform or asking exactly why states suddenly faced the
largest drop in tax revenue in over 50 years.

In prior recessions, state spending growth has generally been below

or on par with GDP growth as a recession hit. This helped to cushion
the fall for state budgets as expenditure baselines grew at a rate that
could generally be sustained by the economy.

The recession beginning in late 2007 was different however. Even as

GDP growth had begun declining in 2005, states ramped up spending
significantly. In 2006, state spending growth had hit 4.9%, while GDP
growth was almost half that at 2.7%. In a glaring sign of fiscal irresponsibility, when the recession became evident during 2008 and GDP growth
had tumbled to 0.4%, states ramped up spending by another 4.2%.

This year, forty-five states overspent their revenues. As a result, 32 states

including the District of Colombia have raised taxes and fees, while
irresponsibly continuing to increase spending despite falling tax
collection and an economic downturn.

By 2009, the year-to-year growth in expenditures prior to the recession

resulted in state budget baselines far exceeding what the economy was
able to handle. The pattern of overspending revenues had finally caught
up with state budget writers. Such growth in government is predictably
unsustainable and it left forty-six states scrambling to find more money.

Overspending Not Low Taxes

Caused the 2009 State Budget Crunch
Over the past decade, states have dramatically increased spending
beyond their means and with little regard for the nations economic
climate. While Gross Domestic Product (GDP) grew at an average annual
pace of 2.6% over the past ten years, state budgets outpaced production,
rising by a staggering 36.6%, when indexed for inflation. In the past five
years, spending in 40 states has outpaced both population and inflation.

Additionally, the only states with a surplus in FY2009 were

Montana, Nebraska, North Dakota, Texas, and West Virginia. Not one
of these five states raised taxes on net since at least 2006.

Many proponents of tax hikes in 2009 argued that tax cuts over the
past few years exacerbated revenue shortfalls. However, all five states
with surpluses for FY 2009 had a record of cutting taxes or avoiding
tax hikes well into the recession. In the 2007-2008 budget cycle, states
that ended the recent budget year with a surplus cut taxes by nearly
$80 million on average far above the average cut of $6.47 million for
all states. Then, these states continued to cut taxes by an average of
$25 million into 2009, even as states overall began raising taxes by
$14 million on average.

In addition to outpacing economic growth, state spending has for years

operated in a counter-cyclical pattern to GDP growth. This creates a great
deal of volatility in state budgets. Tax collection correlates greatly with
economic growth or lack thereof state coffers get fatter during good
years and leaner during bad years. Yet, spending tends to increase more
rapidly during years of economic downturn, resulting in states
overspending their revenue and policymakers pushing for higher taxes,
spending cuts, and greater debt.

States Spending and U.S. GDP Growth are Counter Cyclical

8
7
State
Expenditures
Grow
Unsustainably
Prior to Recession
as GDP Growth
Declines

6
5
4
3

Source: NASBO, BEA

2
1

1988

1990

1992

1994

1996

1998

2000

2002

-1
% Change in US
GDP Growth

AMERICANS FOR TAX REFORM

% Change in State
Expenditures

2004

2006

2008

Gray denotes recessions.

States with Surpluses Cut

Taxes Well Beyond Average U.S. States

Average Net Tax Cuts/Hikes in Millions

States

FY 07-08

FY 08-09

-$36
-$213.3
-$67.1
-$1.2
-$79

$0
$0
-$67.1
$0
-$59.2

(millions)

Montana
Nebraska
North Dakota
Texas
West Virginia

Average Surplus States

Average All States

(millions)

-$79.32
-$6.47

-$25.26
$14.32

Source: National Association of State Budget Officers

In fact, most of these tax cuts far exceeded the average for other states
around the country. The states with the largest budget gaps provided
relatively meager tax cuts in their 2007-2008 fiscal year budgets and
in 2008-2009 raised taxes by $376 million on average well above
the nationwide average of $14 million.

Furthermore, despite the fact that overall tax cuts did take place in
FY2007 and FY2008, states have raised taxes and fees by nearly
$23 billion since the last recession. Clearly, tax cuts have had little
contribution to the 2009 state budget crunches.

Why did Revenues Fall So Hard

This Time Around?
While a significant decline in GDP and economic activity is the primary
reason states saw historic declines in tax revenue, a growing reliance

States

States with Largest FY2009

Budget Gap as % of General Fund
Average Net Tax Cuts/Hikes in Millions

Arizona
California
Rhode Island
Florida
Nevada

Average High Deficit States

Average All States

FY 07-08

FY 08-09

-$177.9
$170
$27.8
-$42.8
$0

$0
$1,896
$15.4
-$29.9
$0

(millions)

-$4.58
-$6.47

(millions)

$376.3
$14.32

on volatile, targeted taxes over the past decade created a tenable

situation that further pushed revenues down.

As outlined in the section above, state spending grossly outpaced

the economy over the past 5 years. As budget baselines rose, states
scrambled to find new sources of revenue without resorting to tax
hikes on the general populous. The tax-hikes-du-jour became
targeted toward higher-income earners, tobacco, alcohol, and other
less noticeable sources, such as higher fees for services.

However, these taxes are also the most apt to decline during downturns. As the economy shrinks, diminishing wages and wealth pull
individuals into lower income tax brackets. Tobacco sales, while
maintaining a fairly consistent decline since the 1980s, and alcohol
sales can also take a hit as wages drop, especially if their prices have
already been inflated by higher taxes from prior years.

State Taxes and Fees have Risen by $23 Billion Since 2002

Taxes Were Cut on Net in Only Two Fiscal Years Since 2001 Recession

Net Revenue from

Tax Change

Net Revenue from

Fee Change

Total Net Revenue

Change

FY 08-09

$715.8

$805.3

$1,521.1

FY 07-08

-$323.6

$208.1

-$115.5

FY 06-07

-$2,333.87
$3,033.4

$685.6

-$2,054.67

FY 05-06

$1,846.5

$279.2

$7,740.8

$508.7

$1,809.5

$3,542.1
$9,550.3

$17,878.43

$5,115.4

FY 04-05
FY 03-04
FY 02-03
Total

(millions)

$7,199.4

(millions)

$819

(millions)

$2,532.1
$8,018.4

$22,993.83

Source: NASBO, ATR

Fiscal Year

2009 STATE TAX TRENDS // AN OVERVIEW OF 2009 TAX CHANGES AND SPENDING HABITS

Percent Change in Quarterly Tax Revenue Year-over-Year

4

Looking at the six years before each of the past two recessions, as the
economy grew, states substantially increased their reliance on alcohol,
tobacco, gas, and other targeted taxes and fees compared to broad
based taxes. For example, states enacted tobacco tax increases worth
a projected $7.1 billion before the 2008 recession, but only $816 million
worth in the corresponding period prior to the 2001 recession.
Similarly, alcohol taxes were raised by a projected $126 million
before the 2008 recession, but only $33 million before 2001. Other
tageted taxes, such as on motor fuels and health insurance, as well as

The next section outlines why these targeted taxes can create great
volatility, poisoning state budget processes, and how this deleterious
trend unfortunately continued through the 2009 legislative year.

Net Number of State Tax Hikes or Cuts Each Year

40

Net Tax Hikes

30

20

10

-10

-20

-30

-40

*Through September 2009

-50
1997

1998

1999

2000

2001

2002

Personal & Corporate

AMERICANS FOR TAX REFORM

2003

Sales

2004

2005

2006

Alcohol & Tobacco

2007

2008

Source: National Association of State Budget Officers

Net Tax Cuts

1996

Source: U.S. Census Bureau

fees, rose by a projected $1.35 billion before 2008, but were actually
cut by $7.8 billion prior to the 2001 recession. At the same time,
between 2004 and 2008, states set out to cut sales, personal, and
corporate taxes, giving taxpayers a false sense that taxes were
actually being reduced.

More Targeted Taxes on Tobacco and Alcohol than Income or Sales

1995

08

Gray denotes recessions.

-2

20

07

06

20

20

03

04

05
20

20

20

02
20

01
20

00
20

99
19

98
19

97
19

96
19

95
19

94
19

93
19

92
19

91
19

90
19

89
19

-1

2009*

Other Taxes & Fees

Tax Changes in 2009

The trend of taxing high-income earners began in 2003 when New York
established a new top tax rate for those earning more than $500,000 in
income. Shortly after, in 2004, Californians approved a proposition
establishing a new top rate for those with incomes above $1 million
and New Jersey followed New Yorks lead in targeting those making
more than $500,000. The targeted high-income taxes were a significant
departure from prior top rates, which began at a little above $40,000 in
California, $75,000 in New Jersey, and a mere $20,000 in New York.
Meanwhile, North Dakota, Rhode Island, and Vermont established new
top brackets in the $300,000 range. Then, in 2008, Maryland enacted a
top rate of 6.25% aimed at those earning over $1 million per year.

The wealthier individuals become, the more they steer clear of states
with heavy tax burdens and instead send their moving vans to states
with lower taxes. The average American household that fled one of
the 10 highest tax states had an income of $70,525 much higher than
the national average of $50,303. Furthermore, those families who
specifically sought shelter in a low tax state had average incomes of
$101,091 nearly double the average household.

Furthermore, in the 4 years after California, New Jersey, and New York
each implemented millionaire taxes, they have seen tremendous growth
in the number of individuals leaving the state. For example, there was a
164% increase in the number of individuals who left California after their
tax hike when compared to the four years before the tax was enacted.
Higher Income Households Flee to Low Tax-States

Source: U.S. Census Bureau, Internal Revenue Service, ATR

Higher-Income Earner and Small Business Taxes

This year, eight states enacted new top tax rates specifically targeted
at higher-income earners and small businesses and, with the exception
of California, no income tax hike this year was broad based. While
proponents framed most of the hikes as millionaires taxes, making
them more marketable to voters, only New Jersey joined California
and Maryland to enact top rates specifically targeted at those earning
over $1 million. In fact, the new millionaires taxes kick in with
income as low as $125,000. Additionally, despite Californias rate
increase in February 2009, Oregon and Hawaii surpassed the Golden
State and are now tied with the highest top rate in the nation at 11%.

High-income earner taxes suffer from the same problem as other targeted
taxes: they place too great a burden on a small tax base. This is even more
problematic as high-income earners are mobile and highly sensitive
to tax code changes that specifically target them for more revenue.

$125,000
$100,000
Income

Thirty-two states, inluding the District of Columbia, raised taxes in

the first 3 quarters of 2009, and most of them focused on the same
targeted taxes that were raised over the past decade. This year, a record
number of states sought out revenue from higher-income residents, avoiding broad based tax hikes. Tobacco and alcohol were also targets for
higher taxes, and were raised more than anytime since 2002. Additionally, at least forty states rose fees or other taxes, a record for two decades.

$75,000
$50,000
$25,000
$0
Average
Household

Average
Household that
Migrates from
High-Tax State

Average
Household that
Migrates to
Low-Tax State

2009 Income Tax Rate Changes

State

Tax Rate Change

Old Top Rate

California
Connecticut

One new top bracket beginning at $500,000

5% over $10,000

Delaware

17% increase in the top rate

5.95% over $60,000

6.95% over $60,000

Two new top brackets with rate

increases beginning at $400,000

8.97% over $500,000

10.75% over $1 million

Hawaii
New Jersey
New York
Oregon
Wisconsin

0.25% added to all income tax brackets

Three new top brackets beginning at $150,000

10.3% over $1 million

8.25% over $48,000

Two new top brackets beginning at $200,000

6.85% over $20,000

One new top bracket beginning at $225,000

6.75% over $142,650

Two new top brackets beginning at $125,000

9% over $7,510

New Top Rate

10.55% over $1 million

6.5% over $500,00

($1 million married)

11% over $200,000

8.97% over $500,000

11% over $500,000

7.75% over $225,000

2009 STATE TAX TRENDS // AN OVERVIEW OF 2009 TAX CHANGES AND SPENDING HABITS

Higher personal income taxes are also punitive for small businesses.
Well over two-thirds of small businesses file personal income tax
returns as pass-through entities (e.g., s-corporations and partnerships), and the highest earning small businesses tend to be the largest
job creators. Higher business taxes are often passed on in the form of
lower wages and less jobs, shrinking the income tax base even further.
Not surprisingly, the top five highest tax states consistently have about
a half-percent higher unemployment rate than the five states with the
lowest tax burden.
High income tax states and those most reliant on top earners experience
much more volatile cash flow and do not weather economic
downturns comparatively well as a result. The most recent recession
was no different. A good measure of a states fiscal health is the deficit
as a percentage of GDP. The nine states with the highest income tax
rates had deficits amounting to nearly 1% of their GDP on average in

Growth in Residents Leaving

State Since Millionaires Tax Enactment

States

2000-2003

2004-2007

% Change

California

-289,712

-765,576

164.25 %

New Jersey
New York

-86,590
-501,676

-199,704
-647,465

130.63 %
29.06 %
Source: IRS

the last year, twice the average comparative gap for the nine states
that have no income tax.

Low Tax States Have Consistently Lower Unemployment

6

5.8

5.6

Unemployment Rate

5.4

5.2

High Tax States

5

4.8

4.6

Low Tax States

4.4

4.2

4
2003

2004

2005

Tobacco Taxes
States have consistently sought higher taxes on cigarettes and smokeless tobacco products to cover revenue projection shortfalls. Over the
past decade, tobacco taxes have risen 210% and in 2009 alone, rates
jumped by at least 15.9% to an average $1.32 per pack.

Tobacco taxes are volatile sources of revenue that make the budgeting
process and revenue projections more difficult. Only 29% of the
cigarette tax increases over the past decade actually met state revenue

AMERICANS FOR TAX REFORM

2006

2007

2008

projections. As a result, lawmakers are more inclined to raise taxes

further in subsequent years to make up for dwindling revenue. For
example, when New Jersey raised the cigarette tax in 2007 by just
17.5-cents the state collected $52 million less than projected and
$22 million below what they collected before the tax hike, worsening
the states deficit. Since targeted tax hikes send consumers purchasing
across state lines and have a negative affect on product demand, any
revenues that accompany a tax hike often quickly diminish.

140

3,000

120

Tax Rate

2,500

100

80

2,000
Consumption
1,500

60

1,000

40

500

20

3,500

Avg. Tax per Pack (cents)

Per Capita Cigarette Consumption

Tobacco Tax Soars as Consumption Maintains Decline

0
1970

1974

1978

1982

1986

1990

2009 estimate based off Jan.-Oct. tax changes and consumption trendline.

Nevertheless, more states raised tobacco taxes than any other type
of tax in 2009. In total, 14 states and the District of Columbia
targeted tobacco consumers for more revenue. Florida, Rhode
Island, and Connecticut all pushed their tax rates up byone dollar

1994

1998

2002

2006

Source: ATR, The Tax Burden on Tobacco

per pack and Rhode Island now has the highest rate in the nation
at a staggering $34.60 per carton. Having not learned from their
prior mistake, New Jersey raised the tax again in 2009 by
another 12.5-cents.

Tobacco Tax Hikes (January October 2009)

State
Arkansas
Connecticut
Delaware
Florida
Hawaii
Kentucky
Mississippi
New Hampshire
New Jersey
North Carolina
Pennsylvania
Rhode Island
Vermont
Washington, D.C.
Wisconsin

Tax Increase
56-cent increase
$1 increase
45-cent increase
$1 increase
40-cent increase
30-cent increase
50-cent increase
45-cent increase
12.5-cent increase
10-cent increase
25-cent increase
$1 increase
25-cent increase
50-cent increase
75-cent increase

New Rate
$1.15 per pack
$3.00 per pack
$1.60 per pack
$1.339 per pack
$2.60 per pack
60-cents per pack
68-cents per pack
$1.78 per pack
$2.70 per pack
45-cents per pack
$1.60 per pack
$3.46 per pack
$2.24 per pack
$2.50 per pack
$2.52 per pack

2009 STATE TAX TRENDS // AN OVERVIEW OF 2009 TAX CHANGES AND SPENDING HABITS

Alcohol Taxes
Lawmakers in eight states raised taxes on spirits, beer, and wine. Many of
these taxes were applied on top of state-mandated prices, state and local
alcohol taxes, federal alcohol taxes, and then sales taxes.
Alcohol tax hikes suffer from the same problem as other tax increases: they
discourage consumption and thus result in lower than projected revenue.
For example, the last time the federal government raised the distilled spirits
tax, it took roughly a decade to bring in more revenue. And when
Kentucky became one of the first states to pass a tax increase on alcohol
in February 2009, tax revenues plummeted. By April, revenue from
distilled spirits taxes dropped by over $1.7 million and was 55% below the
previous year. Tax from wine consumption dropped by more than $75,000.

Alcohol Tax Hikes (January August 2009)

State

Increase

Illinois

Spirits: Increase from $4.50 to $8.55 per gallon

Wine: Increase from $0.73 to $1.39 per gallon
Beer: Increase from $0.19 to $0.23 per gallon

Kentucky

Applied the states 6% sales tax to sales of spirits, beer, and wine. This is in addition to a
non-transparent 11% gross receipts tax already worked into the price of alcohol beverages.

Maine

Increased the tax on liquor served in restaurants and bars from 7% to 8.5%.

Massachusetts

Applied the states sales tax to spirits, beer, and wine, and raised the rate from 5% to 6.25%.
This rate is applied on top of the following taxes already imposed:
Sprits: $4.05 per gallon
Wine: $0.55 per gallon
Beer: $0.11 per gallon

New Jersey

Increases the tax on spirits and wine by 25% at the following rates:
Spirits: Increase from $4.40 to $5.50 per gallon
Wine: Increase from $0.70 to $0.875 per gallon

New York

Wine: Increase from $0.19 to $0.30 per gallon

Beer: Increase from $0.11 to $0.14 per gallon

North Carolina

Spirits: Increase from 25% to 30% tax rate

Wine: Increase from $0.79 to $1 per gallon
Beer: Increase from $0.53 to $0.62 per gallon
This is in addition to the states 39% price markup and 9 additional taxes
already worked into the price.

Vermont

Applied the states 6% sales tax to distilled spirits.

AMERICANS FOR TAX REFORM

eTaxes
States have also begun to expand what goods are subject to the existing
sales tax as a means of quietly raising taxes without the public ire and
outcry of raising actual tax rates. Over the past two years, taxes on
e-commerce, from digital goods to online purchases of virtually
any good, have become a favorite for lawmakers and state tax administrators alike.
In 2009, six states passed taxes on digital goods, such as downloaded
music, books, ringtones, and movies. Combined with the seven states
where tax administrators have unilaterally decided to impose the tax with
little or no legislative oversight there are now nineteen states that
collect taxes on digital goods. While the tax is growing in popularity in
many state capitals, states such as Minnesota, North Dakota, Ohio, and
Oklahoma have specifically exempted digital goods from taxation to
compete with other states to attract high-tech firms and online retailers.
Another tax growing in popularity is the affiliate nexus tax, also
known as the Amazon tax, which allows states to collect taxes on any

good purchased from virtually any online retailer around the country.
While likely a violation of the dormant commerce clause of the U.S.
Constitution, states have continued to push for Amazon taxes unabated.
Two states passed the measure this year (North Carolina and Rhode
Island), but it was also considered by the legislature or passed and
vetoed by the governor in five other states.

Digital and Amazon Taxes Passed by State Legislatures

Year
Digital Tax

Amazon Tax

2007

New Jersey

2008

Indiana, Nebraska, South Dakota,

Tennessee, and Utah

2009

New York

North Carolina and

Rhode Island

Kentucky, Mississippi, North

Carolina, Vermont, Washington,
and Wisconsin

Bag Taxes
More than 20 bag tax bills were introduced across the country in just the
past year. Environmental groups and other bag tax advocates point to
Ireland and San Francisco as policy models. However, experience there
highlights the ineffectiveness and adverse effect of bag taxes and
bag restrictions.
In 2007, San Francisco became the first city in the United States to pass
an outright ban on plastic bags. San Francisco conducted litter audits
before and after the ban. The results? The ban had no impact on the citys
litter mitigation goals. In fact, total bag litter increased from 4.4% before
the ban to 5.9% after.
Then there is Ireland, which imposed a bag tax in 2002 and is often lauded
by those that wish to impose bag taxes on this side of the Atlantic.
Irelands bag tax caused usage of plastic shopping bags to decline by more
than 90%. What bag tax proponents conveniently fail to mention is the
fact that the total amount of plastic bags used on the Emerald Isle has
actually increased 10% since the tax went into effect. This underscores the
fact that consumers rarely discard plastic shopping bags after one use and
efforts to discourage the use of plastic shopping bags can actually lead to

an increase in the total number of plastic bags used. In fact, 92% of the
population re-uses plastic shopping bags to line trash cans, clean up after
pets, and a host of other functions.
Reducing litter in our cities and states is a worthy and noble goal.
However, efforts to do so by imposing a highly regressive tax on every bag
used at the check-out have proven to be misguided and ineffective.

2009 STATE TAX TRENDS // AN OVERVIEW OF 2009 TAX CHANGES AND SPENDING HABITS

Challenges Ahead in 2010

State legislators will continue to face daunting fiscal challenges in
2010. Already, state budgets are estimated to be between $150 and
$170 billion in the red for Fiscal Year 2010. Even if the recession is
over by next year, it is expected that state revenues will continue to
trend downward as the rebound in tax collection historically
lags behind overall economic recovery. After the 2001 recession,
the percent change in growth of tax revenues was negative for
2 additional quarters.

Along with raising taxes, this year lawmakers also relied heavily on
borrowing, which will have to be paid off in the coming years, and one
time federal stimulus dollars which will be exhausted in the near future. Many state legislatures also employed accounting maneuvers that
simply delay tough decisions and necessary reforms. Examples include
redirection of funds earmarked for local governments and delay of state
employee pay by a day or two to push it into the next fiscal year.

These budget gimmicks kick the can down the road, compounding the
problems that lawmakers will have to deal with moving forward. This,
combined with the fact that most of the taxes raised this year wont
meet revenue projections, will contribute heavily to the more severe
state budget crises in the 2010 legislative year. The coming challenges
will require lawmakers to consider bold and innovative reforms that
will mitigate waste, provide relief to taxpayers, and reverse unsustainable over-spending. As such, ATR offers the following policy solutions to balance state budgets without further impugning the already
overburdened American taxpayer.

Defined Contribution Plans provide each worker with his or her own
individual, personal retirement account. Government employees can
choose the blend of investment vehicles that best serve their unique
situation. Best of all (for state budgets), the individual worker has
already paid for his or her own retirement when retirement day comes.
No structural problems occur as population growth declines.
Unfortunately, most states and localities provide defined benefit
pension plans for public employees, which finance retiree benefits
with subsidized contributions from current workers. These plans are
baked in the cake of many of todays budget crises.

Privatization of Infrastructure and State Operations removes the

taxpayer burden of paying for improvements and helps cities to save
money and create jobs. For example, in 2005, Chicago began a lease
of the Chicago Skyway bringing the city $1.8 billion in revenue.
The city also leased four parking garages worth $563 million.
In recent years states with the most severe budget shortfalls have
found privatization to be an effective way to generate new revenue
without raising taxes. This year Arizona will raise $735 million
through the sale of prisons and other state assets. In July, California
authorized the sale of 17 state office buildings and will generate
hundreds of millions of dollars alone through the sale of the Orange
County Fairgrounds.

10

AMERICANS FOR TAX REFORM

Competitive Sourcing opens up jobs currently done by government

employees to private sector competition to save states money and
increase efficiency. For example, Gov. Jeb Bush (R- Fla.) saved
taxpayers over $550 million by outsourcing government services to private companies. A similar measure was also enacted by Gov. Bobby Jindal
(R-LA) this year, and was considered in other states such as Arizona.
Eliminate Prevailing Wage laws to save double digit percentages
in state construction and maintenance, amounting to hundreds of
millions of dollars. Prevailing wage laws require contractors to
essentially pay workers no less than the union wage. As a result,
unionized construction companies significantly inflate the cost of any
government project.

Constitutional Limits on Taxes and Spending: If lawmakers wish to

end the boom and bust budget cycles and eliminate structural deficits,
they will need to promote policies that force the government to live
within its means. The best way to do so is to prohibit government
spending from increasing faster that the rate of population growth and
inflation. Legislation that would require such is commonly referred to
as the Taxpayer Bill of Rights. Colorado implemented TABOR in
1992, and as a result kept government growth in check during the
boom years of the late 90s, allowing it to weather the first recession
of the 2000s while other states were swimming in red ink. Unfortunately, TABOR was suspended in Colorado, and its effectiveness is
muted during the current recession.
California has one of the most severe structural deficits in the country
and is a model of unsustainable state spending. It also underscores the
fact that overspending, not lack of revenue, is the state budget woes.
California spending has nearly tripled since the early 1990s, while
revenues have increased 167%. If California had simply limited
spending to population growth and inflation since 1991, the state
would be sitting on a $15 billion surplus as opposed to the $42 billion
deficit that it started the year with.

Securitizing Tobacco Settlements allows states to sell the revenue

stream of payments from the tobacco Master Settlement Agreement
through bonds in return for large up-front payments. Since 2001,
securitization has helped at least 6 states rectify overspending
problems amounting to over $9 billion by acquiring a large sum of
cash in lieu of raising taxes. This measure can be critical to buy states
the time they need for permanent structural changes.

Reoccurring non-tax revenue: Many states will continue to face

budget shortfalls in the coming years. However, in too many state
capitols across the country there is a lack of political will to make
necessary reforms and spending cuts. In light of this reality it is
important that lawmakers identify all sources of reoccurring non-tax
revenue. Utilization and development of natural resources provides perhaps the most effective source of reoccurring non-tax revenue for states.

In California, the worlds 8th largest economy, perennial budget deficits

have had the Golden State mired in fiscal crises for years. Facing a
record $42 billion budget deficit in February, legislators raised taxes
by $16 billion on the already heavily burdened California taxpayers.
However, utilization of the states vast offshore energy reserves could
have served as a pro-growth alternative to further tax hikes.

There are at least 9 billion barrels of oil off Californias coast and at
least 1 billion barrels are located in waters that are solely controlled
by the state. Reserves found in state controlled waters alone could
generate $5 billion for the state right away via securitization.
Furthermore, these reserves can be tapped using environmentally
sensitive methods such as slant drilling, which requires no new rigs.

Development of all U.S. offshore energy resources that had previously

been off limits would generate $1.7 trillion in local, state, and federal
tax revenue. In fact, development of all U.S. oil and natural gas
resources could yield more than $4 trillion over the life of the
resources. Greater state and federal profit sharing will serve to
heighten this monetary benefit even further. Most importantly,
the substantial injection of revenue will mitigate the prospect of
further tax increase proposals on the already overly burdened
American taxpayers.

The Marcellus Shale Formation in Pennsylvania, Barnett Shale

Deposit in Texas, and Pebble Deposit in Alaska represent onshore

examples of similarly lucrative sources of reoccurring non-tax

revenue. Facing a sizable deficit this year, Pennsylvania lawmakers
are planning to generate hundreds of millions of dollars in reoccurring
non-tax revenue through the lease of state land for energy
exploration. ATR advises lawmakers to utilize and leverage natural
resources found in their state.

Concluding Thoughts
The choice by policymakers in 2009 to rely on targeted sources, such
as higher-income individuals, tobacco, and alcohol, for additional tax
revenue represent an escalation of the same flawed policies that
caused states to have volatile and declining revenue streams in the
current budget crisis.

Instead, state governments should ensure budgets reflect the current

and future economic realities and trends, as businesses and families
do. Spending should be reigned in to sustainable levels, and supported
with a stable and broad revenue base with low tax rates.

Listed above are policy prescriptions to assist states in the short term
with balancing budgets. However, the cyclical nature of revenues that
plagues state budgets warrants structural reform and streamlining
of governance.

As evidenced by the five states in FY 2009 that have a surplus, tax

cuts can help stimulate economic growth without undercutting core
or vital services. In fact, a recent comprehensive study by the

Federal Reserve Bank of San Francisco recently found that a dollar of

government spending results in 70 cents of job-creating activity after
two years. However, a dollar in tax cuts results in $1.30 to $3 of
job-creating activity after two years. Put another way, a $1 cut in
spending reduces job-creating activity by 70 cents. A $1 increase in
taxes diminishes job-creating activity by as much as $3.

Further tax increases at this time will only exacerbate the hemorrhaging
of jobs, perpetuate the outflow of citizens and income to low tax
states, and prolong economic downturns and state fiscal crises
throughout the United States.

For more information on this and ATRs other state policy

initiatives and recommendations, visit www.atr.org. Also,
contact ATR state affairs managers Kelly William Cobb or
Patrick Gleason at 202.785.0266.

2009 STATE TAX TRENDS // AN OVERVIEW OF 2009 TAX CHANGES AND SPENDING HABITS

11

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12

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Americans for Tax Reform Foundation

722 12th St. N.W., Fourth Floor
Washington, D.C. 20005