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Thursday, December 16, 2010

TAX BITS

"With the size of our budget gap, we are looking at a situation of closing down our courts, releasing prisoners and cutting the school year by as much as a month,"
-Rep. Peter Buckley, co-chairman of Oregon's joint Ways and Means Committee

State Revenue Pains
Here's a few tax stories from states trying to get money to keep their spending going without having to cut spending. Its either find more revenue or cut in places the government doesn't want to, so they're finding taxes to raise money.

First up, Oregon's ballot measure 66 passed in January raising taxes on the wealthy in the state. It was sold with the usual advertising: if this doesn't pass we'll have to empty all the prisons, fire all the cops, shut all the schools and line up puppies against the wall and shoot them. It also was sold with the promise that it would raise over $180 million for the state in 2010.

Well it hasn't worked out that way, its only pulled in $130 million, and in the process the state has continued to suffer greater job losses and unemployment than the national average.

Undaunted by the failure of Measure 66 to live up to its advertising, the state legislature voted to raise gas taxes by 6 cents in January 2011. With gas prices going up anyway, this will cost drivers, businesses, and producers more, harming business chances of hiring even further in the state. That means less revenue than expected from this tax as well, as people will cut back where they can to save money.

You know what Oregon could do? Delete its health care plan, voted into law in 1994 when revenues were high and the economy doing well. That was an experiment which has largely been a failure (carriers keep dropping out because the state isn't paying them) and is too expensive to afford now.

Meanwhile, Washington state is looking at a new cash crop: weed. Medical marijuana is legal in Washington, like most western states, and the state is working toward a sales tax on medical pot. The problem with this scheme is that most people who buy pot for "medical" purposes get it from just plain dealers rather than the friendly ex hippie doctor. Note: sales taxes often do not apply to prescription drugs in states that have such a tax, but you know "medical" marijuana isn't exactly like Dilantin.

The vast amount of untaxed money moving around to buy drugs is something governments salivate over, and one of the main reasons the California government tried to get pot legalized in the state. Legalize it and tax it! They cry. Or people could just buy their pot from Dealer McDope like they always did and not pay any taxes.

According to the Center on Budget and Policy Priorities, 30 states passed higher taxes this year. For example:
  • Wisconsin passed a new 7.75 percent income tax bracket (for married couples making more than $300,000 and individuals making more than $225,000). Along with other income tax changes, the package will raise $280 million in 2010.
  • California passed a 0.25 percent across-the-board increase in all income tax brackets, expected to raise $5 billion in FY 2010.
  • Hawaii temporarily created three new higher income tax brackets, starting at $300,000 for a married couple. Hawaii’s top income rate will be 11 percent until 2015, up from 8.25 percent. (Hawaii also increased standard deductions and personal exemption amounts by 10 percent. That will lower tax bills for low- and moderate-income families.) The package raises $100 million for the biennium.
  • New Jersey temporarily increased income taxes on households earning more than $400,000, raising $1 billion in FY 2010.
  • Iowa limited the size of five different business tax credits, saving the state $18 million in FY 2010.
  • Nevada temporarily raised the sales tax rate from 6.5 percent to 6.85 percent, raising $280 million over the biennium.
  • Wisconsin raised its cigarette tax by $.75 a pack to $2.52 and changed the method for taxing snuff. The taxes are expected to raise $170 million a year.
The problems these states face are real, but largely self-inflicted. While its true that they are facing recession-caused revenue drops, the bulk of their spending is due to gargantuan expenses in public union-driven pension and benefits packages they signed into contract during good economic years. Extraneous spending on pet projects, experimental ideas like "green" business subsidies, pork spending, and so on make up another significant portion of the budget.

If a state had its budget cut to the bone as lean and with as little extra spending and non-critical budgeting as possible, then raising taxes would make a lot more sense. Keeping the state at these levels during fat times would cause less problems in lean times. But they don't they spend like crazy and throw money around at all sorts of projects when the going is good, then scream about needing more money when hard tomes come.

State governments need to make hard choices for themselves before demanding their citizens do so, and that's usually the last option on the table rather than the first. If contracts and state workers are costing too much, its time to start letting the expensive current guys go and hiring new ones with a newer more sensible contract that will actually weather hard economic times. Given a choice between no job and a job where they have less benefits, I suspect most would stay on. Letting everyone go and then re-interviewing and hiring people with a different deal could be spendy that year, but would save billions in the future.

But its always easier to just say "lets raise taxes!"

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