States Raising Taxes to Cover Recession Shortfalls

The recession has forced some states to raise taxes -- both personal income and sales -- to make up for budget shortfalls. In the first half of 2009, 10 states made major changes to personal income-tax rates, most of which are retroactive to Jan. 1 of this year.

In recent months, New Jersey, New York, Wisconsin and Delaware have increased individual income taxes for high earners. Hawaii has recently increased its top marginal tax rate to 11 percent, tying Oregon for the highest state taxes in the country.

These latest figures are from a mid-year update to the Tax Foundation's annual Facts & Figures handbook, which compares all 50 states on taxing and spending. It's the first time in the publication's 72-year history that the foundation compiled a mid-year update, which was done because of the number and significance of state tax changes in the first half of 2009. "Many states have started the new fiscal year with tax codes that are vastly different compared to just a few months ago," said foundation President Scott Hodge.

In addition, the report shows that four states have increased sales taxes. California -- which raised its sales tax to 8.25 percent this year -- also allows local governments to add to the sales tax. As a result, five communities in the Los Angeles area have a 10 percent sales tax.

States are also raising taxes on gasoline. New York has the highest gas tax in the country, having increased it to 42.5 cents per gallon from 41.3 cents in January. California has the second highest state gasoline tax, which went to 39.9 cents per gallon from 35.3 cents.

There have also been increases in so-called "sin taxes," with 10 states raising the levy on cigarettes so far this year.

States will likely face deficits totaling at least $200 billion over the next three years, according to the National Governors Association, and most are required to eliminate any gaps by the end of the fiscal year.

Politically, state lawmakers are stuck between a rock and a hard place. A recent poll by The New York Times shows that 56 percent of Americans are not willing to pay more in taxes in order to reduce the deficit. However, nearly as many respondents said they were not willing for the government to provide fewer services in areas such as health care, education and defense spending.

Hodge said that this year's "drop in revenue sources has resulted in large budget shortfalls. State lawmakers are struggling to choose among reprioritized services and different types of tax increases."

But residents of Maine, North Dakota and Vermont have reason to celebrate, as their states have actually cut income taxes since January. I'm thinking that Maine is looking awfully nice this time of year.

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