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As Illinois's political leadership struggles to close a daunting hole in the state's budget, the debate over raising taxes versus cutting services brought the governor and legislative leaders to a near standstill. The Center on Budget and Policy Priorities posted an interesting analysis of how different states are coping with decreased revenues in the ongoing economic crisis. They found that many states are looking at a combination of both spending cuts and tax increases to balance state budgets. According to their research, 23 states have raised taxes since the beginning of 2009, and 13 more states are considering tax increases.
The great majority of states have cut services to families and individuals, including services that benefit vulnerable families. But these cuts have not been sufficient to solve state budget shortfalls; their size is too great for a cuts-only strategy. Were states to rely on spending cuts alone to close their gaps, it would require unprecedented reductions in such essential public services as health care, education, and assistance for the elderly and disabled.
The Center goes on to look at the kinds of taxes that states have increased to cope with the budget shortfalls, and then examines the historical effects of tax increases during recessions.
The recession of 2001 hit some states harder than others. As a result, some states raised taxes while others did not. But there is no evidence that tax-raising states were any faster or slower to recover from the recession than those that did not raise taxes. States that raised taxes were just as fast to rebound from the recession as states that did not, even though they were typically climbing out of a deeper hole. North Carolina, for example, raised taxes by about 3.5 percent of revenues during the last downturn. From 2004 to 2007, total personal income in the state grew by about 6.7 percent each year compared to the nationwide rate of 6.2 percent during this period. North Carolina experienced faster-than-average growth in employment following the last recession, growing about 2.5 percent each year from 2004 to 2007. Nationwide, employment grew at an annual rate of 1.7 percent during this period.Similarly, growth in total personal income and employment from 2004 to 2007 exceeded national averages in South Carolina, Virginia, and Washington — all of which enacted significant tax increases during the recession of the early 2000s.
On the other hand, a number of states that did not raise taxes, or cut them, during the last recession subsequently saw slower-than-average economic growth. Among them are Iowa, Kentucky, Minnesota, Missouri, New Hampshire, and Wisconsin. Those states’ decision to avoid tax increases (and, in some cases, to enact large cuts in services) failed to protect them from below-average growth in both personal income and employment during the subsequent period.
In short, neither economic theory nor experience supports the idea that states should shy away from raising taxes in a recession for fear of harming their economic performance.
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Bring on the income tax increase, please. I'm tired of hearing about this everyday.
Also, you're headline says "A Sate-by-State...".
I think this is a good thing. It's never made any sense to me why the federal government collects a disproportionate amount of the tax revenue, only to dole it back out to the states. Because of this middleman scenario, states can be "fiscally responsible" because the feds are the ones wracking up huge debts. States ought to be doing most of the taxation -- the federal government should only tax things that are federally owned and operated. But hey, what do I know?
The taking in and then doling out is a form of subsidy. Some states get more than they put in, some less. Right or wrong, that's the reason.
I don't buy this study. I did a quick Google of this group and they are a group who advocates for higher taxes and more government spending on programs for the low and middle classes. I am a fiscally conservative Democrat and I'm not condeming them or saying that they aren't participating in a noble cause, but this would be like Faux News releasing an approval rating on President Obama's performance.
I work in corporate finance, and it is generally accepted by finance professionals, economists, and professors that I have worked with and learned from, that taxing affects people's behavior and can incentivize or disincentivize business investment. Large corporations have tax planning groups that spend all of their time trying to minimize tax liabilities and make decisions to expand operations based largely on local/state tax rates. Even though NC raised taxes, the study does not mention what the tax rate was before and after the increase. It just mentions that they raised taxes and experienced above-average growth. A better indicator of the effect of high taxes is to see the inflows/outflows of human capital and businesses in certain states. High tax states like California, the Northeast and Illinois are all experiencing net outflows while Western and Southern states are attracting businesses, or at least they were before the recession. Illinois has to raise taxes now because the budget has to be balanced, but there is plenty of waste that can be cut in the future without having to cut programs for the needy. This government has spent far above the rate of inflation for years.
In my opinion, states should cut taxes during a recession and raise them incrementally during good times. This is the best way to shield from deficits, but self-serving politicians do not want to give voters fodder to boot them from office by raising taxes during a boom.
If they raise the taxes during bad periods to make up budget shortfalls. Are they going to raise it in good periods with budget surpluses or just spend more? I guess the first option...I think we should cut all government programs and start over with only the ones that are important.