States Struggle to Start Fiscal Year

Published September 1, 2009

With Fiscal Year 2010 for many states starting on July 1, many went down to the wire in passing their budgets. Here’s where things stood July 1:

At about 3:00 a.m. July 1, Arizona lawmakers approved a budget plan that did not include either Gov. Jan Brewer’s (R) requested 1 percent increase in the sales tax or a suggested 2.8 percent flat-rate income tax proposal.

Gov. Arnold Schwarzenegger (R) threatened to veto any budget that included tax increases, but the legislature was still negotiating a plan raising vehicle and tobacco taxes and imposing an oil severance tax. No agreement was close.

Without changes, the state’s continuation budget would involve spending $2 billion more per month than it takes in. The state’s comptroller prepared to issue $3 billion in IOUs to fund July expenses.

Last-minute talks in Connecticut did not reach agreement, and Gov. M. Jodi Rell (R) issued an executive order to spend $1.4 billion on essential services through July—essentially all state operations except local grants. Rell had vetoed a spending plan that included an increase in the state income tax from 5 to 7.5 percent.

Gov. Jack Markell (D) signed Delaware’s budget into law. It cuts state employee pay by 2.5 percent and raises the state’s top income tax rate by 1 percentage point to 6.95 percent for four years, following rejection of an effort to increase liquor taxes. The state’s gross receipts and corporate franchise taxes also went up.

For the third consecutive year, Illinois started July 1 without a budget. Gov. Pat Quinn (D) has threatened to veto any budget that is “underfunded.” He’s urging a 50 percent increase in income taxes.

The Indiana Legislature approved a budget with five hours to spare, and it conforms to conditions set by Gov. Mitch Daniels (R): includes no tax increases, keeps $1 billion in state reserves, does not include any spending increases above his recommended spending level, does not borrow from pension funds, and uses stimulus funds for onetime purposes only (infrastructure and final grant installments).

Gov. Deval Patrick (D) signed the state’s budget, which includes an increase in the state sales tax from 5 to 6.25 percent. Taxes on hotels, alcohol, meals, and satellite dishes also went up.

New Hampshire
Gov. Jon Lynch (D) signed the state’s budget, which increases the cigarette tax by one-third to $1.78 per pack, increases restaurant and hotel taxes to 9 percent, and imposes a 5 percent dividends tax on limited liability companies. A new 10 percent tax on gambling winnings of more than $600 also was enacted, plus increased car and boat registration fees.

New Jersey
Gov. Jon Corzine (D) signed the state’s budget, which imposes three-year taxes of 8 percent on income over $400,000; 10.25 percent on income over $500,000; and 10.76 percent on income over $1 million. The state’s cigarette tax rises to $2.70 per pack, and taxes on liquor and wine (but not beer) are also increasing.

North Carolina
Lawmakers in North Carolina approved a two-week temporary budget and cut general fund spending by 15 percent. They continue to debate a House plan to raise the sales tax by a quarter point and impose a higher income tax on those making more than $200,000 a year.

The Senate plan would lower sales and income tax rates but broaden the sales tax. A cap on the state’s gas tax expired July 1. Experts predict the gas tax may go up about 10 cents per gallon as a result.

Gov. Ted Strickland (D) approved a seven-day temporary budget cutting general fund spending by 30 percent. Strickland is pushing to raise more money by installing video lottery terminals in state horse-racing tracks.

Gov. Ted Kulongoski (D) planned to sign a budget imposing for three years an income tax of 11 percent, which would tie Oregon with Hawaii for the highest state income tax in the nation. The bill also increases the corporate minimum tax from $10 to a sliding scale topping out at $100,000. Opponents of the tax increases may take them to the ballot.

Keystone State officials continued negotiations July 1 with no breakthrough. Gov. Ed Rendell (D) is pushing a three-year increase in the state’s flat-rate income tax from 3.07 to 3.57 percent and is rejecting Republicans’ proposals for spending less than last year. Unless a budget is enacted, state workers were to receive partial paychecks on July 17 and 24 and none thereafter.

Rhode Island
Gov. Don Carcieri (R) said he preferred to veto the budget or let it become law without his signature, but the inevitability of it being enacted over his objections and the short timeframe led him to sign it on June 30.

Carcieri’s proposal to eliminate the corporate income tax was not enacted, although the state will keep its optional flat tax. The estate tax exemption was increased to $850,000, short of Carcieri’s recommended $1 million. The budget also raises the gas tax by 2 cents and imposes a tax collection obligation on out-of-state Internet companies with in-state associates. and responded by firing their Rhode Island affiliates. (See story, page 7.)

Joseph Henchman ([email protected]) is tax counsel and director of state projects at the Tax Foundation.