Politics & Policy

The Highest Tax Increases Ever

State and local governments demand that their residents shut up and pay up during a recession.

State governments know we’re in a recession, and they know you’re hurting. That’s why they’re demanding more from you.

We’ve seen a lot of anger about taxes at the tea parties and town-hall meetings this year, and observers might be forgiven for thinking that the federal government enacted income-tax increases the moment Obama was inaugurated. It did not, but Americans are governed by more than Washington, and while Obama has enacted only one major tax increase this year — raising the tobacco tax nearly 62 cents on a pack of cigarettes, to $1.01 — state and local governments have responded to the recession by essentially lifting up their citizens, turning them upside down, and shaking them until all their remaining pocket change falls out.

A new survey of state governments shows that 29 states enacted tax and fee increases this year that are expected to take almost $24 billion from their residents.

Sales-tax increases are common: They will raise an extra $4 billion in California, $889 million in Massachusetts, and $803 million in North Carolina. Income taxes are going up, too: The hikes are expected to generate an additional $4 billion in New York, $1.01 billion in New Jersey, $617 million in Connecticut, $278 million in Wisconsin, and $235 million in Oregon. Higher corporate-income taxes will boost revenues by $110 million in Connecticut, $130 million in Delaware, and $25.8 million in Tennessee. Higher gas taxes will yield an additional $33.9 million in Alaska, $6 million in Maine, $2.4 million in New Hampshire. Apparently concluding that small businesses have it too easy, New Hampshire just added a new interest and dividends tax on limited-liability corporations. All of this is enough to drive you to drink, but state governments will get you there, too: Alcohol taxes are going up in New York, North Carolina, Tennessee, and Vermont.

Did states cut their budgets? Sure: Collectively, the states reduced spending by $31 billion this year, with another $55 billion in cuts slated for next year. (Of course, future budget cuts have a tendency not to turn out as expected. One can be forgiven for doubting that California will really cut its budget by $20 billion next year, as projected.)

How did states get into this mess? Over the past two decades, most states enacted gargantuan increases in spending. States’ collective general-fund spending increased in real terms every year from 1984 to 2002, with the increases ranging from 0.6 percent in 1993 to 5.2 percent in 1999. Real spending fell slightly during the first three years after 9/11 — with declines of 1.4 percent, 3.6 percent, and 1 percent from 2002 to 2004 — before jumping up again in recent years: by 3.4 percent in 2006 and 4.3 percent in 2007. The nominal increases (not accounting for inflation) were often much higher (for example, 9.4 percent in 2007).

Total spending by all states is estimated at $1.23 trillion this year; in 2004, it was $1.01 trillion; a decade ago, in 1999, it was a little over half what it is today, a mere $693 billion.

While this year’s tax increases are the worst — by a lot — it’s not as if state tax and fee revenues have declined in recent years. They’ve increased every year since 2002, except for a 2.1 percent decline in 2007.

And this is just state taxes. Local governments are hiking taxes as well. Pottstown, Pa., is considering a 20 percent hike in property taxes. New Orleans is increasing its property taxes. This year, about 30 Massachusetts communities have voted on property-tax increases. It’s not surprising that local lawmakers think raising taxes is normal, when even Normal, Ind., is doing it. New York City has moved to raise sales taxes, as has Los Angeles County. In Massachusetts, Arlington and Lexington raised hotel and restaurant taxes.

Of course, many of these tax increases don’t work out quite as supporters intend. States and municipalities that raised sales taxes in 2008 are bringing in less revenue than they expected. Many lawmakers blame it on “the economy,” never stopping to think that making an item more expensive might induce people to buy less of it.

Then there’s the “millionaires’ tax,” popularly perceived as going after the little tuxedo-clad guy from the Monopoly board. In many cases, one does not need income of a million dollars to qualify for this tax. In Connecticut, if you’re a single filer with more than $500,000 in income, you pay at the state’s top rate of 6.5 percent. Oregon raised its top tax rate to 11 percent on income over $250,000; in Hawaii, income as low as $200,000 is sufficient to put you in the top bracket.

Maryland was one of the first states to implement a millionaires’ tax (in 2008). It subsequently found that — surprise! — some millionaires chose to live elsewhere; other millionaires stopped being millionaires in the tougher economic climate; and we can wonder whether some voluntarily earned less this year to avoid the new tax. The number of Marylanders with more than $1 million in taxable income fell by one-third, to about 2,000. Taxes collected from those returns declined by roughly $100 million.

More tax hikes are coming down the pike. Starting next year, 33 states will increase unemployment-insurance tax rates. Pittsburgh, concluding that the cost of higher education is insufficiently crippling, is talking about a new municipal tax on college tuition. Vermont is considering a 17-cents-per-bag tax on plastic bags. Santa Clara is considering a new hotel tax to finance a new stadium for the San Francisco 49ers.

In state after state, legislatures are using the stimulus funds to fill in budget holes that are likely to be worse next year. In state after state, lawmakers decided to avoid hard decisions in 2009 by spending funds set aside for 2010.

In New York, notes the Buffalo News, “Lawmakers did themselves no favors by dipping into a pot of federal bailout stimulus funds to the tune of $400 million to help avoid school cuts now; that money was not due to be spent until next year.” In New Mexico, says the AP, “The Legislature estimates that at least $300 million in state money will be needed to replace federal funds next year unless budgets are cut.” In Kansas, the Kansas City Star observes, “To avoid even deeper cuts this year, [Gov. Mark] Parkinson will use $85 million in federal stimulus money that had been budgeted for next year. But the move just creates a bigger hole in next year’s budget.” In Michigan, the AP reports, “The Democrat-led House last week passed a bill that would use more federal stimulus money to reduce the amount of the cuts. The proposal, which would speed up the use of $184 million in stimulus money that is supposed to be saved for next year, has run into opposition in the Republican-led Senate.”

Are state legislators willing to share the pain of their constituents? A few state legislatures have taken pay cuts: The base salary for California legislators was reduced this year from $116,208 to $95,291, while the governor’s salary (which Arnold Schwarzenegger declines to collect) dropped from $212,179 to $173,987. In Florida, legislators’ base pay was reduced from $31,932 to $30,336.

In Massachusetts, 144 members of the 160-member House of Representatives took five voluntary furlough days; yet the overall savings of $263,000 represented a little more than half of what state lawmakers received in pay increases earlier this year.

But checking the charts compiled by the National Conference of State Legislators, we see that quite a few states increased the base salary for their legislators — in most cases, modestly, but in some cases, not so modestly. Base pay for Missouri legislators went from $31,351 to $35,915; in Pennsylvania, it rose from $76,163 to $78,314; in Wisconsin, it went from $47,413 to $49,943. Illinois, the land of Rod Blagojevich, seems exceptionally well-governed, so perhaps raising the base pay of its legislators from $65,353 to $67,836 is justified. At first glance, the increase in Hawaiian legislators’ base salary from $36,700 to $48,708 looks like it must be a misprint; but indeed, the Aloha State enacted a 36 percent pay raise as the economy went deep into recession.

Private-sector employees could be forgiven for thinking that state and local government is a racket. In the private sector, you can do your job well, for a well-established company like Circuit City, KB Toys, Lehman Brothers, Saturn, or Gourmet magazine, and suddenly find yourself without a job for one of many reasons: changing consumer habits, a dramatic drop in revenue, new competition, reckless management decisions, or just bad luck. State and local legislators face possible job loss once every two years at most, and gerrymandering and the benefits of incumbency ensure its rarity. And when the governing classes want more money, they just demand it from those they govern.

In light of all this, one stops asking, “Why are the tea partiers so angry?” and starts asking, “Why are they so calm?”

– Jim Geraghty writes the Campaign Spot on NRO.

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