5 States Hitting Residents With Big Tax Hikes

Updated July 2, 2009.

State legislators faced with mammoth budget gaps and sharply lower revenue are looking to residents to bail them out.

The shortfall for the 2010 fiscal year totals $166 billion across 48 states, according to the Center on Budget and Policy Priorities (CBPP), a think tank in Washington, D.C., that tracks state deficits. States are addressing those gaps in various ways, one of which is raising taxes. Twenty-five states have passed tax hikes this year, and another 12 are considering doing so, according to the CBPP. Lawmakers around the country are realizing that the budget holes are too big to be filled by cuts alone.

"Pretty much everyone is doing poorly," says Kim Rueben, a senior research associate at the Tax Policy Center. "It's just a question of who's hurting more than others."

The heaviest cuts have come in California, which is now on the brink of a financial meltdown. The Golden State is projecting that it will fall short by more than $25 billion in fiscal 2010 and is preparing to issue IOUs to companies and individuals owed money by the state. New York is a distant second with a projected $17.6 billion deficit for 2010, according to the National Conference of State Legislatures (NCSL), a bipartisan policy research organization in Washington, D.C.

How can these states miss the mark so badly? The recession has sapped the two major sources of state revenue: income taxes (thanks to rising unemployment, fewer people are getting paid) and sales taxes (quite simply, consumers are spending less). “Those two things together really, really lead to a high loss of tax revenues, far in excess of loss of income,” says Michael Hicks, director of Ball State University’s Center for Business and Economic Research.

Even though raising taxes are typically a last resort, many states have no choice but to do so. And, in some, lawmakers are leaving no stone unturned when it comes to finding items or services to tax. New York, for instance, has raised taxes on tobacco, wine and limo services. Meanwhile, Massachusetts lawmakers approved a tax on satellite television service and Georgia lawmakers proposed a “pole tax” that would charge gentlemen’s club patrons $5 at the door. 

To figure out which states are inflicting the biggest tax hikes on residents, SmartMoney pored over reports from tax research groups and contacted state budget offices. We looked at state budget deficits tracked by the NCSL and current sales tax rate data from the Federation of Tax Administrators, a group that provides services to state tax authorities. Finally, we turned to the Tax Foundation -- a nonpartisan tax research group -- for figures on tax burden, the average percentage of each state's residents' income that is paid in state and local taxes; the figures we use are for 2008.