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1 Joseph Henchman, State Tax Changes during 2011 1 (2012)

handle is hein.taxfoundation/ffdadxz0001 and id is 1 raw text is: FONAINFiscal Fact May 31, 2012 No. 303 State Tax Changes During 2011 By Joseph Henchman Introduction The U.S. Census Bureau reported last month that state tax collections in FY 2011 reached $764 billion, an increase of 8.9 percent over 2010. The amount is the second-highest ever, behind only the $781 billion collected in the bubble year of 2008. Each state saw growth in tax collections, in amounts ranging from 0.4 percent (Hawaii) to 44.5 percent (North Dakota) (see Table 1). Individual income taxes, excise taxes, and sales taxes led growth, while property tax collections dropped due to assessments catching up with depressed home values. Even accounting for the drop in state tax collections due to the recession, strong pre-recession growth means that state taxes have grown at a healthy 4 percent annual rate from 1997 to 2011 (see Figure 1). State budget gaps occurred because state spending relied on revenue projections growing at an unsustainable 8 percent per year. The consequent correction has been termed the New Normal: an era where state officials must make do with lower annual tax revenue growth, more in line with long-term economic growth. In the short term, as boom turned to bust, the combination of unsustainable spending commitments and dropping tax revenue led to opening of significant structural budget deficits in many states. States generally took one of three approaches in resolving these deficits. One group of states rolled back spending growth commitments made during previous years and took actions to spend no more than the state brings in. Arkansas and Indiana are examples of two states that took this path. A second group of states raised taxes, deciding that the benefits of sustaining state spending outweighed any economic damage that might result from tax increases. Most states taking this option aimed their taxes at specific groups such as high-income earners, tobacco purchasers, or out-of-state Internet retailers. These revenue sources may provide short term relief but can cause substantial economic harm to the state economy in the medium and long term. A third group of states adopted the politically easiest path: use one-time funds and accounting gimmicks to

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