Temporary Tax Increases Actually Proving Temporary

Milton Friedman famously said that that there is “nothing so permanent as a temporary government program,” and this adage is often applied to proposals for temporary state tax increases to address budget gaps. But states that have enacted temporary “Millionaire’s Taxes” (actually income taxes on high earners, typically with income thresholds somewhere above $150,000) are actually letting those taxes sunset on schedule:

New York’s highest tax rate on incomes exceeding $500,000 will fall back to 7.85 percent, from 8.97 percent, this year. [JB: This is actually an error in the Businessweek story; New York’s top rate will return to 6.85 percent.] Maryland’s 6.25 percent tax on incomes above $1 million expired at the end of 2010, while California’s top tax rate for millionaires has dropped to 10.3 percent from 10.55 percent.

You can add to that list New Jersey, where a temporary top rate of 10.5 percent for 2009 was allowed to sunset for 2010 and beyond, at Gov. Chris Christie’s insistence. By my count, that means that every state that imposed a temporary Millionaire’s Tax to bridge the recent downturn has let it sunset on schedule or is widely expected to do so, with the possible exception of Hawaii. (California Governor Jerry Brown is trying to get an extension of various temporary taxes, including the Millionaire’s Tax, but is not likely to succeed.)

U.S. states will still be more levying more Millionaire’s Taxes in 2012 than they did before the recession. That’s because several other states imposed new or higher Millionaire’s Taxes that were always intended to be permanent: Connecticut, Oregon and Wisconsin. Maryland’s 2008 tax increase package was a mix of permanent and temporary: a top rate of 5.5 percent for high earners will continue indefinitely, compared to a pre-2008 top rate of 4.75 percent.

Hawaii’s temporary Millionaire’s Tax does not expire until 2015. It’s too early to know what will happen there, but experience on the mainland would lead me to bet on expiration. Hawaii’s state government is dominated by Democrats, but then so is Maryland’s.

Back in 2008 and 2009, there was a lot of fear among tax opponents (and hope among tax supporters) that a bleak budget outlook would drive lawmakers to extend or make permanent even the parts of tax increases that were deemed “temporary.” Fortunately, that is not proving true.

Note: An early version of this post incorrectly stated that Hawaii’s Millionaire’s Tax is permanent.

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