States raise taxes and boost fees to fill gaps

Hold onto your wallets: America's cash-hungry states are quietly piling on hidden fees and modest tax hikes.

States are facing the most dramatic drop in revenues in a decade. And they're desperately trying to fill their coffers.

Yet in this election year – and after a decade of big tax cuts – lawmakers are loathe to raise unpopular income or sales taxes. Instead they've been tweaking and jiggling budgets – nipping expenditures here, boosting fees there.

• In Wisconsin, speeding-ticket and court-filing fees are jumping 30 percent. Thirteen states are raising fees for such things as driver's licenses and car registrations.

• In California, where lawmakers are on day 43 of a budget impasse, everything from cigarettes to satellite-TV service to space launches may see higher taxes.

• At least 18 states have raised cigarette taxes.

• Six states have tried tax-amnesty periods that let deadbeats pay off their tax debts with no penalty.

Many states have scrambled to avoid raising taxes, instead raiding rainy-day funds or using tobacco-settlement money to balance their budgets. And so far, lawmakers have kept tax hikes relatively small: Just 16 states raised taxes more than 1 percent for fiscal year 2002.

Yet many budgeteers are running out of options. Two-thirds of all state revenues come from sales- and personal-income taxes – and these broad-based levies are likely to jump if the economy doesn't rebound.

"States have taken up as much slack as possible," says Nicholas Jenny, an analyst at the Rockefeller Institute of Government in Albany. "But once you've done these things, you generally can't do them again. So unless the economy improves, more dramatic measures will be required."

The hardest-hit states have already taken some drastic steps. Massachusetts had to bridge a $2.5 billion budget gap, so it raised taxes by $1.14 billion. It eliminated a planned income-tax decrease and dropped the deduction for charitable contributions.

It also raised the state cigarette tax by 75 cents. The average nonsmoking Bay State resident will pay an additional $317 in taxes next year. For one-pack-a-day smokers, the hike will average $592.

California, meanwhile, is still figuring out how to cut spending and boost revenues enough to fill an enormous $23.6 billion budget gap. At one point, legislators considered boosting the state's car tax by $78 for the average auto – but balked for fear of public backlash.

A new plan would raise the tax on a pack of cigarettes from 87 cents to $3 – meaning most packs would sell for about $7. In the nearly smoke-free Golden State, it's not an unpopular option. Satellite TV subscribers may also see a 5 percent tax hike. And levies on space launches by private companies may jump by about $1 million per blast-off.

Like California, most states have avoided broad-based sales and income taxes: They can ignite widespread public ire and create a drag on the already sluggish economy.

Instead, cigarette taxes are popular this year – although observers warn they can boost inter-state tobacco smuggling.

Also, 16 states have used their tobacco-settlement money to help balance their budgets, according to the National Conference of State Legislatures (NCSL) in Denver. Wisconsin even leveraged its entire tobacco windfall, which it was supposed to receive over 25 years, to raise $825 million to help cover its $1.1 budget shortfall.

And 19 states tapped their rainy day funds, with Connecticut and New Jersey completely depleting theirs.

Many state budget moves to date have been one-time actions, or are seen as politically palatable. It's all part of an effort to stall for time and hope the economy improves.

Legislators are "keeping their fingers crossed and hoping we avoid a second dip in the economy – and that revenues rebound rapidly," says Arturo Perez, a state-budget analyst at NCSL.

But some states haven't been able to stall. In all, states raised taxes by a total of $6.7 billion in 2002, according to NCSL. That's the first time since 1994 that states, as a whole, have raised taxes. In fact, between 1995 and 2000, they cut taxes by a total of $34.2 billion.

Next year could bring more hikes. With state Medicare spending alone expected to grow at about 8 percent, many governors – including Ohio's Bob Taft (R) and Kentucky's Paul Patton (D) – have hinted or explicitly stated that tax hikes are on the horizon.

"Just about everyone I talk to is expecting further need to rectify the budget situation in the states," says Mr. Jenny. And that means the potential for tax hikes is high.