Historic Shrink of Government? States May Have No Choice

Smaller government fans may be in for a historic period.  Due to severe budget crises, state governments throughout the U.S. are “cutting budgets” i.e. shrinking in size.  Lack of money is forcing legislators, regardless of party affiliation, to shrink government spending.  In many cases states can not just raise taxes and fees enough to close the gaps.


Georgia, for example, this week, announced its revenue had shrank for the 15th consecutive month.  Revenue for February 2010 is a whopping 41.3% below February 2007.  January was down 27.3% from 2007.  Georgia legislators are faced with figuring out how to run the state on less money.  They will be forced to shrink the size of government.

 

The Tax Foundation recently highlighted Georgia’s budgetary issues in two releases, “Recession Offers Georgia Opportunity for Tax Reform”  and Georgia Cigarette Tax Hike Would Spur Cross-Border, Black Market Sales

Georgia residents pay the 16th-highest state-local tax burden in the country according to the Tax Foundation.

“There’s just no way to put a pretty face on it,” Lt. Gov. Casey Cagle said in an interview with The Associated Press. “We’ve got to cut this budget and we have to live within our means.”  (Emphasis added)

Georgia Not Alone, All States are Cutting

Georgia is not alone in facing severe cuts.

John Thomasian of the National Governors Association Center for Best Practices outlined the environment and cuts facing state governments in his paper, The Big Reset: State Government after the Great Recession

He writes, “So how must state government adjust to meet the new challenges? Already governors are grappling with this issue. Almost every state has an internal process underway to examine how to cut costs, and several states have created formal task forces or commissions to look at cost- savings and streamlining. Most efforts start by exploring the traditional tools of budget cutting: targeted and across-the-board program cuts, reductions to local aid, layoffs, benefit cuts, furloughs, and salary reductions. In today’s environment, however, states quickly find that these options do not shift the cost curve sufficiently, and they must look at actions that change the way government does business.

Additional steps that are being considered or undertaken today include:

Selling state assets (such as surplus equipment and state office buildings);

Consolidating data centers and IT functions;

Coordinating purchases across agencies;

Consolidating state real estate management into one entity and conducting a review of
real estate holdings and leasing arrangement; and

Reorganizing and combining agencies.”

Profound Changes in State Government

Thomasian writes,  “The current fiscal crisis has spawned a new round of state performance reviews, many of which will yield profound changes in the services state government delivers. This period of government downsizing and streamlining may be a protracted one, ending only when state budget health is restored. The delicate balance will be maintaining those services that help the state prosper, while eliminating those that produce the least value.”  (Emphasis added)

The challenge is that most of our legislators are reluctant to cut government programs.  Segments of the voting community also want their favored programs protected.  We may see a historic shrinking of state government if our legislators and voters reset budgets as circumstances dictate.

Those in favor of smaller government will be tested and have an opportunity to influence this process.

This “reset” of state government will affect all areas of lifestyle including education, jobs and safety. The big question yet to be answered is:  “Will people be happier with a smaller state government that taxes less and provides less services?”

Will California’s Tax Proposal do any good?

California has always had a wild streak.  This week California’s new tax proposal reinforced that image.

The Commission on the New 21st Century Economy  issued its report this week on a radical new tax structure for California.  Like all political taxing plans it has its good and bad aspects.  It did, however, increase discussion about what California needs to do to become an attractive state for business and individuals.

Here are the recommendations of the Commission: (My comments are in red)

  • Reduce Personal Income Tax (PIT) for every taxpayer – Reduce the number of tax brackets from six to two. The new tax rate would be 2.75 percent for taxable income up to $56,000 for joint filers ($28,000 for single) and 6.5 percent for taxable income above that amount. These changes would retain the PIT’s progressive nature but reduce income tax rates for all taxpayers. The proposal would reduce the amount of income tax paid by 29 percent.  (This is Good)
  •  Eliminate the corporation tax and minimum tax – Eliminate the corporate tax, which is currently at 8.84 percent. The $800 minimum franchise tax should also be eliminated. (This is Good)
  •  Eliminate the state general purpose sales tax – Eliminate the current 5 percent state sales tax, with the exception of the sales tax on gas and diesel fuels which would continue to be dedicated to transportation. Elimination of the sales tax would phase in over five years. (This is Good)
  • Establish a business net receipts tax (BNRT) – Establish a new tax, not to exceed 4 percent, applied to the net receipts of businesses. Small businesses with less than $500,000 in gross annual receipts would be exempt from this tax. This tax would have a much broader base than the sales tax (since it would apply not only to goods but also to services and to sales into the state from businesses located outside the state) and, unlike the sales tax, be deductible against federal taxes. (This is very very Bad)
  •  Create an independent tax dispute forum – This forum would provide taxpayers with a forum for resolving disputes with the state. (This is Good)

I have discussed previously why California is a Worst State.  It over taxes, over regulates and is costly do business there.  See our previous post California Facts Suggest it is a Worst State

This proposal does not appear to fix these problems.  It just shuffles the burdens around a little by being according to the Commission “revenue neutral.”

“This is the most significant tax policy proposal in three decades,” said Assemblyman Chuck Devore (R-Irvine). “But the chances of this getting approved, as is, are zero percent.”  The LA Times reported the proposal is unlikely to pass.  See LA Times story Tax commission report falls flat, but it’s a start

With the U.S. in the midst of a severe job shrinkage, it is only a matter of time that some states and legislatures start getting serious about creating an environment conducive to job creation.  Cutting tax burdens and tax rates will be a strong first step in getting the job engine going.  California’s proposal unfortunately is not a step in the right direction. It will remain a Worst State for Taxes even if it passes the Commission’s recommendations.

Tax Freedom Day 2009: Pick Your State Carefully

The Tax Foundation recently released their 2009 Tax Freedom Day Study.  It measures how many days the average worker must work to  pay taxes. There is a wide disparity among states. The tax burden you bear can significantly impact your quality of life.

The Best State for Tax Freedom is Alaska where it takes 82 days almost 25% of the year just to pay taxes.  Louisiana, Mississippi, South Dakota, North Dakota and West Virginia are also rated Best States for Tax Freedom.  If you are not retired, these states would be considered as candidates for Best States to Work.

The Worst State for Tax Freedom is Connecticut where it takes 120 days or until April 30 to pay taxes.  If you live in Connecticut 1/3 of your time every year goes to pay taxes to the Federal, State and Local governments.  That is almost 50% more days than Alaska.  New Jersey, New York, California and Maryland are also rated Worst States for Tax Freedom.

According to the Tax Foundation study, five major categories of tax dominate the tax burden. Individual income taxes, both federal and state, require 38 days’ work. Payroll taxes take another 27 days’ work. Sales and excise taxes, mostly state and local, take 15 days to pay off. Corporate income taxes take 6 days, and property taxes take 12. Americans will log 4 more days to pay other miscellaneous taxes, most notably including motor vehicle license taxes and severance taxes, and about 1 day for estate taxes.

What state you live in is very important in determining your lifestyle as higher cost of living states tend to have higher tax burdens.  Lower disposable income is the result.  Many states are also increasing many taxes due to economic conditions which will increase tax burdens.  Noteworthy examples are the proposed increases in New York and California that will make these heavily burdened states more undesirable to live.  If you are not retired, New York and California would have to be considered as 2 of the Worst States to Work.

Tax
State Days Freedom Day
1 Alaska 82 23-Mar
2 Louisiana 87 28-Mar
3 Mississippi 87 28-Mar
4 South Dakota 88 29-Mar
5 North Dakota 91 1-Apr
6 West Virginia 91 1-Apr
7 Alabama 92 2-Apr
8 New Mexico 92 2-Apr
9 Montana 93 3-Apr
10 Kentucky 93 3-Apr
11 Oklahoma 94 4-Apr
12 Iowa 94 4-Apr
13 South Carolina 94 4-Apr
14 Arkansas 94 4-Apr
15 Tennessee 95 5-Apr
16 Wyoming 95 5-Apr
17 Missouri 96 6-Apr
18 Maine 96 6-Apr
19 Texas 96 6-Apr
20 Nebraska 98 8-Apr
21 Kansas 98 8-Apr
22 Nevada 98 8-Apr
23 Indiana 98 8-Apr
24 Florida 99 9-Apr
25 Oregon 99 9-Apr
26 North Carolina 99 9-Apr
27 Michigan 100 10-Apr
28 Arizona 100 10-Apr
29 New Hampshire 100 10-Apr
30 Ohio 101 11-Apr
31 Delaware 101 11-Apr
32 Vermont 102 12-Apr
33 Idaho 102 12-Apr
34 Georgia 102 12-Apr
35 Colorado 102 12-Apr
36 Illinois 103 13-Apr
37 Hawaii 103 13-Apr
38 Utah 103 13-Apr
39 Wisconsin 103 13-Apr
40 Pennsylvania 104 14-Apr
41 Rhode Island 104 14-Apr
42 Minnesota 105 15-Apr
43 Washington 106 16-Apr
44 Massachusetts 106 16-Apr
45 Virginia 106 16-Apr
46 Maryland 109 19-Apr
47 California 110 20-Apr
48 New York 115 25-Apr
49 New Jersey 119 29-Apr
50 Connecticut 120 30-Apr

Source: Tax Foundation, Tax Freedom Day

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