The fiscal year wraps up today in most states and, unlike some past years, most have enacted budgets on time.
Modest economic growth has led to stable revenues in most states. The exception: Lower revenues from falling oil prices continued to hit some energy states hard. Some states struggled to fill budget gaps from earlier tax cuts. Overall, this year saw some new tax increases and a few tax cuts.
Let’s start with the tax cuts:
Rhode Island expanded its earned income tax credit, increased the tax-exemption amount for pension income for low-income retirees, and reduced its minimum corporate income tax for small businesses.
Tennessee lawmakers cut the state’s tax rate on taxable investment income from 6 percent to 5 percent and took steps to eventually eliminate the levy. In 2017, the tax rate on interest and dividend income will fall to 5 percent. Additional rate cuts will be triggered by future revenue growth. If the tax is completely repealed, the state would lose about $300 million in revenue.
North Carolina increased the standard deduction for its personal income tax, helping middle income taxpayers. The $145 million cut offsets about half of what the state “overcollected” in 2016. North Carolina is also asking voters to pass a constitutional amendment to cap the tax rate and set new rules for the state’s rainy day fund.
The New Jersey House proposed a swap of a sales tax cut from 7 percent to 6 percent for a 23cent gas tax hike which Governor Chris Christie was in favor of. The additional revenue from the gas tax increase will shore up its Transportation Trust Fund but the sales tax cut reduces general fund revenue by over a billion dollars. The New Jersey Senate however decided not to take it up today.
While some states were cutting taxes, others were raising them. Two, California and South Dakota, passed tax hikes even though they were not facing severe budget crises. Others were closing budget gaps.
California approved a 10 percent medical marijuana tax that would increase revenue by about $165 million. The levy will take effect in 2018 only if voters reject legalization of pot and the 15 percent excise tax in a November referendum.
South Dakota increased its sales tax from 4 percent to 5 percent and dedicated the revenue to increasing teacher salaries.
Oklahoma raised several taxes in the wake of a budget shortfall caused by collapsing energy prices and a personal income tax cut the legislature passed in 2014. The state cut its operating budget by 7 percent, made its already low earned income tax credit nonrefundable, repealed a deduction for state and local taxes, and capped a tax credit for underperforming oil and gas wells.
Louisiana’s Governor John Bel Edwards took over in mid-year and immediately faced an almost $1 billion deficit. The legislature agreed to raise cigarette, alcohol and sales taxes, cut spending and tap the state’s rainy day fund. It also used the first $200 million check from its $20 billion settlement with BP from the 2010 Deep Water Horizon oil spill.
West Virginia, facing a $270 million budget gap driven largely by a collapsing coal market, increased cigarette taxes by 65 cents.
Hit hard by falling oil prices, Alaska Governor Bill Walker proposed two once-unthinkable options: restoring an individual income tax and capping the oil and gas dividend checks paid to every resident each October. Both measures failed and the legislature tapped the rainy day fund for $3.5 billion but Governor Bill Walker vetoed $1.29 billion, including half the funding for the oil and gas dividend checks and almost all of the funding for oil production tax credits. It remains to be seen if the legislature has the votes to override the veto.
Massachusetts legislators are close to a budget agreement to close their $750 million gap and have passed a one-month extension in case they miss the June 30th deadline. Then, there are Illinois and Pennsylvania where lawmakers are again locked in bitter fiscal battles. Some things never change.
Note: updated 7/1/2016 to correct Oklahoma which did not enact a cigarette tax increase.
