States Get Creative to Balance Budgets -- Like Taxing Candy for the Kiddies

BOULDER, Colorado -- Colorado kids better stock up on candy and sodas before May 1, when the state reinstitutes a sales tax on the goodies.

Meanwhile, folks selling agricultural products (such as pesticides or bull semen), out-of-state online stores and more are already paying higher taxes in the state as of this week.
The reinstated taxes, along with eliminated tax breaks, are expected to bring in $15.6 million through the end of June and $132.6 million in the 2010-2011 fiscal year for the state. Those changes will combine with a range of budget cuts, including furloughs for state workers, a reduction in prison spending, eliminating some college scholarships and more, to make up a $2.2 billion shortfall this year and a $1 billion shortfall for next year.

"They're called the dirty dozen," said Marty Neilson, president of the Colorado Union of Taxpayers, an anti-tax group. "Those were all tax increases and they should have been put to a vote of the people."

The Colorado General Assembly managed to get around a constitutional requirement for voter approval of tax hikes because of the "temporary" nature of the tax breaks. They were adopted in 1999 and 2000, when the state was flush with cash and the Taxpayers Bill of Rights, or TABOR, required the state to return money to taxpayers every year.

At that time, the state made permanent cuts in the state sales and income taxes. But the legislature designated other cuts as temporary.

"During the last recession, 41 states increased taxes," said Carol Hedges, senior analyst with the Colorado Fiscal Policy Institute. Colorado was not among them. Instead, lawmakers covered revenue shortfalls with a combination of budget cutting and shifting money from one place to another.

But this year, Gov. Bill Ritter called for the tax hikes at the start of the legislative session in January.

"The thing that's been difficult in Colorado is that the legislature doesn't have the authority to raise taxes," Hedges said. "You can't change a tax rate."

A year ago, the state Supreme Court ruled that lawmakers could rescind tax exemptions made in the past, Hedges said, opening the door for this year's action.

Tax opponents, who've been successful in stemming most increases at the ballot, are now targeting four state Supreme Court justices up for retention in the fall. "The talk is to clear the bench," Neilson said. "When you have a Supreme Court that is ignoring the Constitution, your only choice is to get new justices."

The state's 2.9 percent sales tax now applies to:

- direct-mail products
- agricultural supplies
- software downloaded or purchased from out of state
- takeout containers that food vendors purchase
- fuel used for industrial purposes

A tax credit for fuel-efficient vehicles is also being eliminated.

Colorado is among several states using a combination of tax hikes and budget cuts to battle declining revenue during the recession. Through July 30, 2009, 30 states had approved tax increases, Hedges said. Other state measures, according to the National Conference on State Legislatures:

- Hawaii increased income taxes for high-wage earners in the state from 8.25 percent to 11 percent.
- New York also raised income taxes for high-wage earners, with the increase to expire in three years.
- Idaho increased sales taxes on some candy and sports drinks, with the change expected to raise $40 million in the first year.
- North Carolina raised the sales tax rate by 1 cent through mid-2011.
- Arizona voters will decide May 18 on a proposed 1 percent sales tax hike for the next three years.

The primary reason that more states are looking at tax hikes -- even temporary increases -- is that most already trimmed their budgets, said Bert Waisanen, a fiscal analyst with NCSL. In Arizona, for instance, the state has sold off public buildings, closed highway rest areas and more.

"We are seeing more action this year on the existing tax base," Waisanen said. "Colorado's one state that's moved along more quickly than other states."