Talked about this too, how Federal tax cuts will be offset by State increases in taxes, fees, etc...
State Tax Hikes Pick Up Steam,
Undermining Bush Stimulus Plan
By JACKIE CALMES
Staff Reporter of THE WALL STREET JOURNAL
OMAHA, Neb. -- While President Bush vows that his third round of federal tax cuts will be the charm that restarts the economy, so many cash-starved state and local governments are raising taxes that their budget-balancing is considered certain to blunt the promised stimulus.
Unlike Mr. Bush and Congress, local and state governments must balance their budgets. And more than ever in this third year of economic weakness, they are resorting to tax increases, according to the National Conference of State Legislatures and U.S. Conference of Mayors. These levels of government have exhausted easier cost-cutting steps and one-time fixes and are loath to slice deeper into budgets that mostly cover such basics as education, Medicaid for the poor and nursing-home patients, police and highways.
Republican-led states such as Nebraska are as likely as any to raise taxes, despite Mr. Bush's own anti-tax orthodoxy. On Saturday, Alabama's Republican Gov. Bob Riley reached agreement with the Democrat-controlled state legislature on a budget raising taxes $1.2 billion, the biggest increase in the state's history. While "sin taxes" on cigarettes and alcoholic beverages and various user fees continue to be the most popular sources of new revenue, increasingly states are hiking sales and income taxes as Nebraska has done, and raising college tuition, too.
Twenty states raised taxes this year, and 11 more are considering raising them, according to the liberal Center on Budget and Policy Priorities. No region is exempt: Taxes are going up from Idaho and Nevada, to Ohio, Georgia and Connecticut, all of which have Republican governors. Perhaps nowhere will the increases be so great as in Democrat-led California, with its $38 billion deficit. Cities and counties are acting in turn, as states shift functions to them while slicing aid.
"At least half the stimulus will be offset by the tax increases" of state and local governments, says Mark Zandi of Economy.com, which does economic analysis and consulting. Next year, for example, he calculates that the Bush tax-cut package could add 0.54% to economic growth, while the state fiscal drag would subtract 0.28%, for a net stimulus of 0.26%.
For individuals computing their tax liability, the math is much the same. Consider Wes and Laurie Buller, one of the families Mr. Bush singled out here as winners when he visited several states last month to promote his tax cuts. Even as the Bullers were later flying to Washington at the White House's invitation, to watch the president sign tax cuts into law, the Nebraska legislature was enacting tax increases to help balance the state budget. Back home now, Mr. Buller figures the family's $900 in federal tax relief may be more than wiped out by state increases.
Nebraska's legislature, facing a shortfall of perhaps $800 million, or about 15% of its entire two-year budget, decided to make permanent income- and sales-tax increases that originally were due to expire this year. Taxes on beer, wine and liquor go up 25% in October. The Bullers don't smoke, but Nebraskans who do are hit with a tax increase of 30 cents per pack.
"They're going to take away what the president is giving us back -- in fact more," grouses Mr. Buller, a Republican.
Nebraska Gov. Mike Johanns originally proposed balancing the budget solely by cutting spending. The legislature, where 33 of 49 members are fellow Republicans, instead proposed a $5.4 billion two-year budget that included a mix of more than $400 million in spending cuts and about $350 million in tax increases. When Mr. Johanns vetoed the package, the legislature easily overrode his move.
The tax increases will "undo a lot of what the president is trying to accomplish" to stimulate the economy, Mr. Johanns warned.
"The legislature felt like we had to exercise leadership," Speaker Curt Bromm counters. "We have to balance the budget," adds state Sen. Kermit Brashear, also a Republican, "and we aren't going to destroy the University of Nebraska system and K-through-12 education to prove how conservative we are."
LOCAL LEVIES
While the federal government puts through $350 billion in tax cuts, states are facing big budget gaps, with many looking to raise taxes. See an interactive graphic showing the tax burden in a dozen cities across the country.
State and local tax increases take a proportionately bigger share of income from those who aren't wealthy, analysts say. By contrast, the federal tax cuts mainly benefit higher-income individuals, because of their emphasis on breaks for stock dividends and capital gains. "You'll find that lower- and middle-income taxpayers probably are going to experience very little federal relief," yet get disproportionately hit by higher state and local tax hikes, predicts Dan Bucks, executive director of the Multistate Tax Commission, which tracks tax policies.
Local billionaire Warren Buffett made a similar argument in publicly opposing Mr. Bush's plan. "Giving one class of taxpayer a 'break' requires -- now or down the line -- that an equivalent burden be imposed on other parties," he wrote in a Washington Post column last month. His arguments didn't persuade Nebraska's Sen. Ben Nelson, one of two Democrats in the Senate to support the federal tax-cut measure.
But Mr. Nelson, a former Nebraska governor, went along only after Mr. Bush agreed to back $20 billion in aid for states. He said he told the president, "If we're going to get the best advantage from a stimulus, you can't ignore what's going on in the states and cities."
Nebraska won't use its $109 million share of federal funds to undo any tax increases. With tax collections continuing to fall below projections, officials here, as in other states, expect cash-flow problems this summer and want to hold some money in reserve.
There was no such talk when Mr. Bush was here in Omaha last month. The Bullers were among 10 area taxpayers the president featured at a rally; that, in turn, led to their White House invitation. The president said the Bullers would get $900 in relief, since the tax credit for children Bailey, 13, and Maddie, 7, would go to $1,000 each from $600, and more of the family's income would be taxed at the lowest 10% rate.
Back at work at Omaha Door & Window Inc., Mr. Buller pokes at a calculator to compute his potential hit from increased state income and sales taxes. Beyond that, Mr. Buller said his 1916 house needs work, and the 5.5% sales tax -- which used to be a half-percentage point lower -- will apply to more things, including many home repairs.
The family may face higher property taxes, too. Another new state law frees local governments to raise property levies a limited amount for schools without voter approval. Many will do so, local officials say, since Nebraska is cutting aid to cities, counties and various special-purpose districts by one-third or more in the next two years, after 25% cuts last year.
Wendy Shepherd, an accountant at ConAgra Trade Group in Omaha and a single mother of two, also was among those Mr. Bush singled out at the Omaha rally. She will actually get half the $800 federal relief claimed for her that day, which was based on an additional $400 credit for each child. What the White House apparently didn't realize was that Ms. Shepherd and her former husband each claim one child as a dependent, splitting the tax benefit. Meantime, she could owe about $70 more a year in state income taxes on her $60,000-a-year income. Property taxes have gone up in the past year and may well do so again. She will incur the extra sales tax and, as a social drinker, the higher alcoholic-beverages taxes.
"I'm not opposed," she says of the state and local increases, noting that her young children will attend public schools. Nor are many others in the state who worry about erosion of public services. Lynn Rex, executive director of the Nebraska League of Municipalities, and an associate, the city of Norfolk's administrator, Michael Nolan, lobbied to get legislators to cushion the cuts to cities. They lost, but both expressed sympathy for the lawmakers. "What the legislature did was responsible," Mr. Nolan concedes.
"If citizens understood the impact of a state budget with just cuts alone," says Ms. Rex, "there'd be a revolt."
online.wsj.com |
