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1 Joseph Henchman & Xander Stephenson, A Review of 2010's Changes In State Tax Policy 1 (2010)

handle is hein.taxfoundation/ffcebxz0001 and id is 1 raw text is: ......... . . .. IN 4 in, August 23, 2010. No. 241 . ..\.- A Review of 201 O's Changes In State Tax Policy By Joseph Henchman & Xander Stephenson Introduction The last few years have seen state lawmakers struggle with unsustainable spending commitments they made when the economy was booming. Year-on-year decreasing tax revenues have not only opened up a widening structural deficit but depleted rainy day funds and overused one-time and emergency budget solutions. The federal stimulus law in 2009, replicated in miniature in the just- passed $26 billion stimulus, runs out in 2011. According to a July 2010 report from the National Conference of State Legislatures, 41 states closed or are closing a budget gap for their FY 2011 budgets. Thirty-three states project budget gaps for FY 2012 and 23 states for FY 2013. Alarmingly, 25 states have assumed in their FY 2011 budgets the receipt of additional federal aid in amounts that are probably larger than what is actually forthcoming. On the other hand, overall tax receipts increased during the first quarter of 2010, and states as a whole project that FY 2011 revenues will be 3.7% higher than FY 2010. In addressing gaps between desired spending and projected revenues, state officials must make serious choices. One option is to raise taxes. Officials generally claim that the budget cannot or should not be cut any further, and that the benefits of tax increases for the state budget outweigh the economic damage they can do in an economic downturn. Most states taking this option have aimed their taxes at specific groups, such as high-income earners, smokers, or out-of-state business transactions. Some states have raised the sales tax. These revenue sources may provide short-term relief but can cause harm to the state economy in the short and long term. Another option is to roll back spending growth commitments made during previous years and take actions to spend no more than the state brings in. Some states have resisted the urge to patch their budgets with one-time revenue sources, instead focusing on balancing structural revenues with structural expenses. Arkansas, for instance, uses an innovative priority-based budgeting system. Indiana officials cut spending and assumed no extension of federal aid. States have also drawn down rainy day funds and other balances. Joseph Henchman is Tax Counsel and Director of State Projects, and Xander Stephenson is Adjunct Scholar at the Tax Foundation.

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