Illinois—land of Lincoln, but now land of Obama—has just given itself the third highest combined national-local corporate income tax in the industrialized world, the Tax Foundation reported Jan. 13.The Illinois action leads what is to be a stampede of tax increases among the states in 2011 and beyond. So, while raising the federal debt ceiling is debated in Washington, 49 states must balance their budgets with no way to raise their debt limit.
Illinois “took the risky step of jacking up income and corporate taxes even as its economy struggles to shale off recession,” as The Wall Street Journal wrote. Led by the lame-duck Democrats in the legislature, the individual income tax will rise from 3 percent to 5 percent, a 67 percent hike. The corporate tax rate will jump from 7.3 percent to 9.5 percent increase.
Some sensible folks in Illinois fret that the increases will chase both business and residents out of the state. Democrats there fear its potential adverse implications for the 2012 election. Illinois is one of the states with the widest budget gaps–$17 billion, edged out only by California with budget gaposis of $17.2 billion.
In California, Democrat perpetual Governor Jerrry Bown Jan. 10 called for a budget that would slash spending to most state government departments but maintain a series of tax increases for five years in the hope of narrowing the state’s budget deficit, the Associated Press reported. He even took on reductions in welfare, social services, and health care for the poor as well as a $1 billion cut in the California State University systems. Brown also wants the legislature to call a special election this summer to give residents the opportunity—if you can call it that—to continue hikes in the state income, sales and vehicle levies for five years . He hopes to pick up new money amounting to $12 billion that way.
Brown said: “For 10 years, we’ve had budget gimmicks and tricks that pushed us deep into debt,” as if the Democrats weren’t in charge of the legislature. He added, “We must now return California to fiscal responsibility and,,,economic recovery and job growth.” Just the sort of actions his Republican opponent in the November election, Meg Whitman, was calling for. Brown’s proposal to raise taxes will need support from Republicans in the legislature. But they have pledged to oppose all tax changes. Good luck, Governor Moonbeam.
A combination of growing opposition to tax increases and some federal grants to states helped the most debt-burdened states in 2010, the Tax Foundation said. But it added that “2011 may be a year of dramatic tax increases.” The Center for Budget and Policy Priorities says” States have closed budget shortfalls of more than $430 billion for 2009, 2010, and 2011, but “they will continue to face large gaps in 2012 and 2013”
In the first weeks of 2011, the Associated Press wrote in a Jan. 16 story, “Republican and Democratic governors alike have begun detailing across-the board pain” for education, health care, transportation, public safety , and other programs. “[C]hanges could radically shift expectations of what services government provides.” Before the November election, Democrats held 26 of the nation’s governorships. But that changed impressively.
The Democrats lost 6 governor seats and the Republicans picked up 6 seats. Many new GOP governors are taking a cue from New Jersey Governor Chris Christy, the new rock star of state houses, according to the Pew Center. Christy, elected in 2009, promised to cut state spending, fight any tax increases and address New Jersey’s deficit problem. He chopped away $2.2 billion in spending and made unions help to reduce an estimated $46 billion in unfunded pension liabilities. Christy cancelled an exorbitant project that was underway to build a passenger rail tunnel under the Hudson River between New Jersey and New York City. He also vetoed the effort to renew the state’s “millionaire” tax.
Other governors are luring jobs to their states by trimming regulations and privatizing state-run departments. For example, Republican Terry Branstad in Iowa has praised the privatization moves of Indiana’s Mitch Daniels and wants to do away with the state’s business recruitment office and put in its place a public-private commission. One the other side of the coin, Lincoln Chafee in Rhode Island wants to increase the sales tax, even for groceries.
He also banned state employees from going on talk radio. Now that’s a cutting-to-the bone economy measure for sure.
The fiscal 2011 budget year started for most states in mid-2010. Some 25 states initially budgeted for getting added federal grants. But the grants never arrived. Tackling spending eased debt pressure on some states. But
others believed their budgets could not be cut further. Rainy-day funds dried up. Taxing-raising states turned mainly to high-earning residents, smokers, and out-of-state business transaction, the Tax Foundation said.
The politically easiest option, said the Tax Foundation analysis, “is to use one-time funds and accounting gimmicks to paper over the current state budget shortfall.” The study called this approach “irresponsible.” California, it said “is the poster child of this approach, building for several years up to a crisis in 2009.” That’s when the state issued IOUs, borrowed, seized funds from local governments, and enacted requirements that companies increase withholding of what workers owed. Illinois “may have out done California at fiscal irresponsibility by simple refusing to pay months’ worth of bills,” the study said critically.
Ohio and some other states are looking at unions’ expensive pension benefits, which has risen out of bounds. So, several big public and private-sector unions have launched a campaign to block cuts. The AFL, American Federal of State, County, and Municipal Employees, the Service Employees International Union, and American Federation of Teachers are ganging up to fight against cuts in their pensions. The expensive pensions are being targeted by several states, The Wall Street Journal wrote Jan. 15. Miami city attorney Julie Bru was quoted as saying: Wages and pensions are the biggest chunk of our budgets. It’s a different day for public-sector employees.”
It appears it will be a different day for all state and local services.
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