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1 Elsie M. Watters, State Tax and Fiscal Prospects, 1986 [i] (1986)

handle is hein.tera/stafiects0001 and id is 1 raw text is: TAX FOUNDATION, INCORPORATED ) ( R WASHINGTON, DC 20005 ONE THOMAS CIRCLE, N.W., SUITE 500 L. I A L 1 P O TELEPHONE (202) 822-9050 State Thx and Fiscal Prospects, 1986 By Elsie M. Watters Vice President-Research Tax Foundation, Incorporated Tax issues will be confronted by more than half of the state legislatures holding regular se'sions in 1986. Pending legislation, however, stands to have little overall effect on the level of state taxes, because increases contemplated in some states are likely to be offset by reductions elsewhere. More- over, the states with the most pressing fiscal problems appear generally to be looking more to spending cuts than tax increases to ease budget pressures. As of early March, a Tax Foundation survey found that 16 states were considering increases in one or more major taxes (sales, income, excises). At the same time, tax reductions were the major issue in at least 6 states, generally those where sizable budget surpluses are projected. In at least 14 states, potential budget deficits in fiscal 1986 were headed off by spending cuts; and in many states, proposed spending in- creases for fiscal 1987 are either modest or nonexistent. While the large majority of states are not seeking new revenues in 1986, the finances of most states mirror, to a varying degree, the influence of several forces tending to exert downward pressures on revenues. (1) Most important among them has been the slowing in the momentum of overall economic growth since 1984, which lowered automatic tax increases below earlier projec- tions and led to revenue shortfalls. Gross national product (GNP) growth in current dollars slowed from 11.0 percent in 1984 to 5.7 percent in 1985. State tax revenues, which jumped nearly 15 percent in fiscal 1984, rose by less than 9 percent in 1985. (2) In several states, notably those heavily dependent upon energy resources and agriculture, economic performance fell well below the national average, upsetting financial plans made earlier under more favorable assumptions. (3) Some substantial tax increases enacted to bolster state receipts during and after the 1981-82 recession have expired or been repealed, and new tax cuts have slowed revenue growth in some states. (4) In the past five years, Federal grants-in-aid have dropped from 26 percent of state-local general expenditures to 21 percent, and further reductions are expected. On the spending side also there have been forces at work tending to put pressures on available revenues. Recent state commitments, for example, to excellence in education mean that the states are picking up from local governments a larger share of the expanded tab for local schools and other programs in education. Improved road and highway systems are also on the priority list in several states, along with expanded programs for water projects, pollution control, prison reforms, and a host of other purposes. The states considering tax increases in 1986 include: Ala- bama, Colorado, Florida, Hawaii, Idaho, Kansas, Loui- siana, Missouri, Nebraska, New Mexico, North Carolina, South Dakota, Tennessee, Virginia, Washington, and West Virginia. Aggregate increases, if all proposals were ap- proved, could yield about $1.5 billion in new annual reve- nues. Slightly over half of that ($850 million) would repre- sent higher sales taxes in 7 states. The remainder ($650 million) would be in the form of higher cigarette levies (3 states) and motor fuels taxes (8 states). Besides these major tax proposals, some states appear to be examining all possible sources of new revenues. The approaches include: cutting down on general sales tax ex- emptions; eliminating the once-popular subsidies for ethanol (gasohol) sales; imposing taxes on smokeless tobacco where it is not now taxed; amnesty programs to recover unpaid taxes; new forms of legalized gambling-lotteries, casinos, and parimutuels; and giving local governments a freer rein in raising taxes for themselves. On the other hand, either the governors or legislative leaders (or both) are calling for tax reductions in Connecti- cut, Delaware, Michigan (a $360 million income tax reduc- tion has already been enacted this year), New York, Pennsyl- vania, and Rhode Island. The reductions, largely in income or sales taxes, total around $1.5 billion, about the same size as the proposed hikes in other states. While not aimed at revenue reduction, legislative consid- eration of changes in methods of taxing the income of multi- national corporations could, if enacted, lead to between $300-and-$400 million in additional tax reductions. Califor- nia, Idaho, New Hampshire, and Utah are considering limit- ing the scope of these taxes to a water's-edge basis. No regular legislative sessions are scheduled in 1986 in Arkansas, Mo )tana, Nevada, Oregon, and Texas. Selected State Reports Alabama. The governor has proposed a tax increase plan to buffer the effects of Federal cutbacks on aid to the poor; he Copyright 1986 by Tax Foundation, Incorporated, One Thomas Circle, N.W., Suite 500, Washington, D.C. 20005 * (202) 822-9050

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