State Deficits Leading to Tax Hikes

Even if Barack Obama decides to shelve his tax increases, don't get too comfortable with your tax bill just yet. At the state level, lawmakers are struggling to overcome big deficits, and it looks like increased taxes may be the only solution.

If you've been thinking about writing a manuscript about the futuristic society that taxes citizens on the air that they breathe, you may have missed your opportunity. Now that the governor of New York wants to tax your music downloads, the air tax concept may lack comic punch.

There's no way to say it nicely: the recession is hammering state budgets. Unlike the federal government, which has no restriction on deficit spending, most state governments are legally required to balance their budgets. This is challenging enough in normal economic times, but it's downright ugly when the economy goes sour. As tax revenues decline and the demand for state-funded services increases, state deficits grow-and tough choices have to be made to close them. Slate.com recently reported that 22 different states were struggling to cover budget gaps.

Lawmakers in California and New York have proposed creative tax increases to solve their deficits. The California plan involves the establishment of various "fees," while the Governor of New York wants his residents to pay taxes on iTunes downloads, movie tickets, cab rides, cable television, and more.

How the West was won

California's budget negotiations seem to have disintegrated into political warfare. A law in the Golden State requires that all tax increases receive a two-thirds majority vote, which means that the controlling Democrats need to enlist some Republican support. Unfortunately, there's no meeting ground between the two parties; the Republicans want to cut spending and freeze taxes, and they aren't negotiating. To resolve the situation, the Dems have put together a comprehensive plan that gets around the two-thirds requirement, essentially by calling some of the increases "fees" instead of taxes. The convoluted plan incorporates some tax cuts, but they don't offset the additional taxes and fees that Californians will have to pay if the plan goes through. Highlights include:

• A $0.39 per gallon fee on gas, which would replace an existing $0.18 gas tax and a half-cent gas sales tax

• A state income tax surcharge of 2.5 percent

• A 0.75 percent increase to the state sales tax

A bite out of the Big Apple

Lawmakers in New York are taking a different approach. Governor David Paterson says his state's in a bind because taxes generated by Wall Street have all but evaporated.  He's proposing a whole slew of new taxes, including assessments that would increase the cost of downloaded music and movies, beer, wine, soda, cigars, and cab rides. He'd also reinstate the sales tax on clothes purchases that are currently exempt.  Paterson's budget, which also incorporates a 1 percent increase in spending, requires legislative approval.

If the iPod tax goes through, who knows what could be next. Reality continues to be stranger than fiction.