Recession Raises State Revenue Gaps

June 23, 2009
Special Feature

Job losses are cutting into state income tax revenue at the same time that sales tax receipts are dropping as consumers cut spending. The resulting red ink has state legislators scrambling to find ways to close the budget gaps.

Back in the flush times of just a few years ago, state budget deficits were scarce, with just a few states spending more money than they took in. Now the state fiscal picture has flip-flopped and just two or three states are still in the black. Job losses are cutting into state income tax revenue at the same time that sales tax receipts are dropping as consumers cut spending. The resulting red ink has state legislators scrambling to find ways to close the budget gaps.

California, with a shortfall of about $25 billion, and New York, with a $17.6 billion revenue gap, lead the list of states in budget trouble. The fiscal remedies in both states are similar; both states have boosted their income tax rates and California has added a penny to its sales tax. In addition, New York has increased several “sin” taxes on items like cigarettes and wine. For New Yorkers, the increases add to a state and local tax burden that’s already the second-highest in the nation, according to the Tax Foundation. Florida has also hit smokers with an additional dollar-a-pack tax increase and raised motor vehicle fees. Even tax-friendly Nevada is raising its sales tax and hitting tourists with a 3% increase in the hotel-room tax.

The budget crisis also has many state legislatures thinking outside the box. Among the tax ideas that may or may not become law are a proposed sales tax on satellite TV service in Massachusetts, a tax on sugar-laden soft drinks in New York, and a proposal to legalize and tax marijuana for personal use in California.