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1 Elsie M. Watters, State Tax and Fiscal Prospects, 1988 1 (1988)

handle is hein.taxfoundation/stxfscpp0001 and id is 1 raw text is: TAX FOUNDATION WASHINGTON, DC 20005 ONE THOMAS CIRCLE, N.W. SPECIAL REPORT TELEPHONE (212) 822-9050 State Tax and Fiscal Prospects, 1988 By Elsie M. Watters Consulting Economist Tax Foundation State legislatures this year face an extensive array of tax proposals, following a near-record volume of legislation in 1987. At least 28 of the 44 states holding regular sessions in 1988 will consider changes in one or more major taxes. (No legislative sessions are being held in Arkansas, Montana, Nevada, North Dakota, Oregon, and Texas.) According to a Tax Foundation survey as of Mid-March, 22 states will seek higher taxes, with potential revenues totaling more than $4 billion annually. Six other states are weighing reductions, generally in small amounts adding up to under $200 million. The prospects for enactment of the bills pending, as well as potential revenue effects, are difficult to predict. It is an election year, when state officials are reluctant to impose higher taxes on their constituents; many proposals are somewhat nebulous; some require voter approval; and others lack strong legislative backing. Deliberations in 1988 follow a year in which nearly all states with income taxes reexamined their tax structures vis-a-vis possible revenue changes that would automati- cally result from the 1986 revision of the Federal tax code. In addition, many states looked at nonincome taxes for new revenues. Altogether, 28 states last year sought to raise close to $8 billion annually in new revenue to balance ongoing budgets and pay for.growing spending programs. It is estimated that $6 billion in higher taxes was enacted. The 1988 tax increases are sought primarily to meet rising costs of improved local school programs; to finance continuing highway construction, maintenance, and re- pair; to strengthen medical care funding; and to balance generally rising budgets. The most popular targets for new revenues this year are levies on motor fuels (increases are pending in 11 states), general sales (10 states), personal income (6 states), busi- ness profits (6 states), cigarettes (5 states), and alcoholic beverages (3 states). The changes under consideration, by type of tax, are summarized below, followed by a state-by-state summary of proposed revisions. General Sales Taxes.Ten states are weighing increases in general sales taxes, and three are considering slight reductions. Sales tax rate increases have been proposed in Michigan (sponsored by education groups for more equi- table school financing), Missouri (for medical care), North Carolina (for local public school buildings), and West Vir- ginia (for general budget balancing). Base-broadening measures extending the sales tax to cover items previously exempt, mostly some services, are being considered in Arizona, Colorado, Idaho, Louisiana (one proposal would remove all sales tax exemptions), Washington, and Wiscon- sin. Most base-broadening proposals involve extending the tax to a limited number of items. Florida's unsuccessful 1987 experience in attempting to expand the tax to cover a comprehensive range of services appears to have discour- aged efforts in other states to gain large new sums from increasing the variety of items taxed. In three states, proposals call for slight reductions in the sales tax. Some lawmakers in Connecticut have asked for the exemption of clothing items costing less than $100, as well as a rate reduction; the governor of Kansas wants to exempt new manufacturing machinery and equipment; and South Dakota repealed a one-cent temporary hike in the sales tax two months early. Personal Income Taxes. Thirteen states are considering personal income tax revision this year Six states are looking for new revenues from the changes; three states may reduce income taxes; and in four states the revisions would be neutral. Increases in personal income taxes are pending in Ala- bama, Illinois, Kentucky, Massachusetts, Missouri, and Wisconsin. Some legislative leaders in Alabama want to raise income taxes to gain an additional $304 million for higher state spending. Illinois' governor has indicated strong support for income tax increases to support a more generous state budget. In Kentucky, where the legislature did not meet in 1987, some lawmakers want to conform the state tax to the new Federal code in order to gain new state revenue. Massachusetts lawmakers will also consider con- formity to the Federal law, to raise $74 million in new revenue. Missouri is expected to consider 7 1/2% sur- charges on income taxes; and some Wisconsin legislators seek repeal of the state's 60% capital gains exclusion that was retained last year in a comprehensive tax revision. Personal income tax reductions are pending in Kansas, Oklahoma, and Vermont. Kansas may return all or part of the windfall resulting from Federal tax revision. Okla- homa may restore the extra personal exemption for the low- income elderly, along with cutting the top marginal rate for those who deduct Federal taxes in computing state tax liability. The governor of Vermont recommended a tempo- rary cut in the tax rate, as well as an earned income tax Copyright 1988 by the Tax Foundation , One Thomas Circle, N.W., Suite 500, Washington, DC 20005 (202) 822-9050

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