Cash-strapped states cut taxes in the recession

By Oregon Tax News,

States across the nation are cutting taxes to boost stagnant economies.  Texas, Arizona, and Maine are all taking steps to lower taxes.  A recent study by former U.S. Treasury economist Robert Carroll shows that states with lower corporate tax rates have higher wage gains and more productivity over time.

Governor Rick Perry announced that Texas created more jobs in 2008 than the rest of the states combined.  Texas does not tax capital gains or income.  In July the state had an unemployment rate of 7.5%, two points below the national average.  Governor Perry has worked to attract businesses to Texas.  Businesses like Medtronic and Caterpillar are moving to Texas to take advantage of the state’s stable budget and low taxes.

Arizona is following suit.  The legislature will vote on tax reform to lure employers and high-income taxpayers to the state.  Republican Governor Jan Brewer’s plan would reduce the state’s corporate income tax rate from 6.97% to 4.86%.  The proposal cuts all personal income tax rates by 6.6%, and abolishes a hated statewide tax on commercial and residential property.  To balance the decreases, the plan temporarily raises the states sales tax.

In Maine the Democratic legislature and Governor John Baldacci enacted sweeping tax reform.  The new law removes the state’s graduated income tax structure with a top rate of 8.5% and replaces it with a simple 6.5% flat tax.  Those with earnings above $250,000 will pay a surtax rate of 0.35%, for a total rate of 6.85%.  Maine plans to finance the tax breaks with $300 million in cuts to the states $5.8 billion budget.  It also proposes to expand the state’s 5% sales tax on services that had been previously been exempt, such as ski lift tickets.

Three states that have raised taxes

New Jersey lawmakers approved a string of 103 tax increases which created a large state debt.  From 2001 to 2008, New Jersey lost a net 25,000 private-sector jobs as public employment grew by 65,000 workers.   New Jersey is now considering adopting a flat tax.

Maryland lost one-third of its millionaires when it created a millionaire tax bracket by raising the top marginal income-tax rate to 6.25%.  As a result, Baltimore and Bethesda have increased income taxes to support city services.  The combined state and local tax rate in Maryland can go as high as 9.45%.  Critics point out that the drop in top wage earners is a reflection of national income trends and not directly related to the tax.

Finally, Oregon raised taxes on incomes over $125,000 and on business by increasing the corporate minimum tax.  Currently, these taxes are being challenged by a state referendum petition effort to bring the issue to the statewide ballot.

— By Oregon Tax News

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