What Tax Cut?
States are using higher taxes and fees to take back what Uncle Sam is giving away
By Leonard Wiener

You might want to relish that tax cut George Bush gave you last year--the one he argued in the State of the Union address last week should be made permanent.

That's because for all the dollars the feds are letting you keep, the states are scrambling to grab some of them right back with tax increases and a plethora of user fees and other levies designed to fill their bare coffers. States are in a fiscal bind partly because they raised their budgets in the 1990s to meet rising social needs, then saw revenue plummet. Most tie their income tax to the federal Internal Revenue Service filings. The combination of declining taxpayer income, new federal breaks, and often ill-advised state tax cuts caused a slash in revenue.

Facing yawning budget gaps--totaling about $200 billion over the past three years--state legislatures are trying to ease the revenue squeeze by disconnecting their tax rules from the federal system. That can mean denying on state individual and business returns the federal favors that Washington is bestowing on stock dividends, inherited estates, capital gains, and deductions.

Overall, 18 states imposed major tax increases last year that are expected to raise $6.2 billion for fiscal 2004, according to the Nelson A. Rockefeller Institute of Government in Albany, N.Y. That's on top of boosts of nearly $6 billion that 15 states enacted in 2002. This is the heaviest round of increases since hikes during the recession of the early 1990s. In 2001, only six states hiked taxes; during the three years before that, it was mostly tax cuts.

Printing press. All states except Vermont have laws that generally call for a balanced budget, but there's another big difference between state capitals and Washington. "Unlike the federal government, the states cannot print money," says Nicholas Jenny, a senior policy analyst at the Rockefeller Institute. So states have been raising taxes, limiting deductions, borrowing money, cutting spending, and engaging in tactics such as speeding up collections and tapping "rainy day" funds.