Just like kids learning they get in less trouble for stealing a cookie than for taking the family car out for a joy ride, a new study shows that state lawmakers are learning how to raise taxes and get in the least amount of trouble. The good news is, they are learning.
According to an analysis of state tax trends over the last 25 years by Americans for Tax Reform, states are raising taxes less, and cutting taxes more, and are increasingly relying on targeted taxes as revenue sources, rather than on broad-based taxes.
In the early 1980s, a deep recession prompted states to raise their income, sales and corporate taxes in order to fund spending increases on the backs of their entire populations. As the states pulled out of the recession and entered a period of economic expansion, they continued to raise taxes to fund ever-growing spending. When the recession of 1990 hit, states raised their income taxes 42 times between 1990 and 1994, taking an additional $33 billion from taxpayers.
After the 1990s recession and tax hiking frenzy, governors and state legislators found that not only do higher taxes stunt economic growth and drive residents to low tax states, but raising taxes is also a ticket to early retirement. The 1994 elections saw Republicans pick up 10 governorships, including a major upset in New York, where George Pataki, R, defeated the tax-increasing incumbent Gov. Mario Cuomo, D. The GOP also picked up 505 state legislative seats and gained control of an additional 11 state Senate chambers and eight state House chambers.
The ATR study shows that starting in 1995, state lawmakers cut taxes for seven consecutive years as they tried to stem the exodus of residents to low tax states and to distinguish themselves from their tax-and-spend predecessors. When the 2001 recession rolled around, state tax increases were far smaller than in previous downturns. This time, tax increases as a percentage of Gross Domestic Product (GDP) peaked at 0.08 percent, less than one-third the size of tax increases in the 1981 and 1990 recessions.
Now, rather than cutting spending, taxaholic lawmakers are adding on double and triple layers of taxation onto small groups of constituents by raising taxes on what they see as politically safe targets like tobacco, telecommunications and housing.
Tobacco taxes, often seen as the cash cow for states, accounted for 30 percent of tax increases during the last recession compared to just 5 percent during the 1990s recession. In 2002 alone, 20 states raised their tobacco taxes. Even this year, with the majority of states spending through surpluses, four states passed tax hikes to squeeze even more revenue out of smokers.
Of course, the D.C. area is certainly no stranger to elected officials splitting taxpayers’ wallets up into chewable chunks. In Virginia, this session brought the approval of a telecom restructuring bill that”equalizes” taxes by imposing taxes on growing industries and lowering taxes on declining industries. It doesn’t take a mathematician to see how state coffers will benefit from that one.
In Maryland, we see a lingering tobacco tax hike proposal that rears its ugly head whenever a special interest group sees they can get money out of it.
In 2002, Maryland raised its cigarette tax from 66 cents to $1, and even The Washington Post noted an immediate jump in smuggling and to criminals who only dealt illegal drugs previously smuggling cigarettes to take advantage of the profitable black market with less severe punishments. Maryland State Comptroller William Donald Schaefer was quoted by The Washington Post as saying, “We know that some of the money used by smugglers is directly passed on to terrorist organizations.”
Of course, I’m sure Delaware, West Virginia and Virginia would gladly accept a higher tax in Maryland and the revenue Maryland consumers will hand over to their shops.
In D.C., the Council found even more money to give to special interest groups like “Peacaholics” by raising the realty transfer tax in the budget. While the Council’s quiet movement to raise the cost of buying a house in the District is probably not the driving force behind the region’s slowing housing market, it certainly is not rolling out the welcome mat for economic growth and home ownership.
So where do states go from here? Looking ahead to an aging population and swelling entitlement programs, it is time for elected officials to rein in reckless government spending. Two great ways to get spending growth under control: Shift state pension systems from defined benefit to 401(k) style defined contribution plans, and turn to free-market solutions for health care, such as Health Savings Accounts (HSAs). In the meantime, watch out for tax-and-spenders raiding your cookie jar.
Grover Norquist is president of Americans for Tax Reform. The 25-year state tax trends study is available online at www.atr.org.
