States Scramble to Boost Tax Revenue as Federal Aid Dries Up

States Scramble to Boost Tax Revenue as Federal Aid Dries Up

With tax revenue receipts still in the tank for most US states, they are scrambling for ways to boost tax receipts.  Accounting Today reports:

States are intensifying theirefforts to confront the challenge of winnowing down budget shortfalls by raising sales tax rates, increasing the number of items taxed, and more aggressively asserting nexus.

“States are facing huge shortfalls, with 2011 predicted to be even worse,” said Carla Yrjanson, vice president of tax research and content for indirect tax at Thomson Reuters. “They need to do things they can control, and one of these is to expand the definition of nexus, and who needs to pay. The other is to increase taxes, and there is a lot of activity in that area.”

Consumer taxes for retail sales items, gas and cigarettes all continue to climb, according to an annual survey of consumption taxes by CCH. “From the increases in consumer taxes, it’s evident that many states are trying to shore up revenue shortfalls,” said CCH senior state tax analyst Daniel Schibley. “Many other states have not yet increased taxes, but may do so.”

The healthy way for tax revenues to get a boost would be via an improving economy – but it doesn’t look like that’s happening.  So, the states are now going to force the issue, and hunt down additional tax dollars themselves.

The problem with this approach, of course, is that each additional dollar that state governments collect is one less dollar for their productive private sector citizens and businesses.

And since we’re in quite the economic pickle, a rational economic thinker might be inclined to keep the precious dollars out there in the hands of the more productive folks – not the less/unproductive public sector.  But, I digress.

And how many states are in trouble?  A bunch of them…as 46 are facing shortfalls:

States are searching desperately for ways to come up with revenue, echoed Randy W. Donald, co-practice leader of the transaction tax practice at Ryan Inc. “They have $120 billion in budgetary shortfalls, and they’re running out of federal aid,” he said.

The Center on Budget and Policy Priorities estimates that at least 46 states had shortfalls when adopting budgets for the current fiscal year (FY 2011, which began July 1 in most states). “Fiscal year 2011 gaps – addressed with spending cuts and revenue increases by most states – totaled $121 billion, or 19 percent of budgets in 46 states,” it stated.

“The issue of whether a retailer is responsible to collect tax on the states’ behalf has been around a long time, but the Internet has made it worse,” said Donald. “The problem with state budgets is that they rely on transaction taxes and income taxes to generate revenue. If people aren’t spending or working, it’s hard to make revenue grow.”

I think we are officially on State Default/Bailout Watch, as it’ll be too much of a slog for many states to implement the austerity measures necessary to deal with the economic realities of a depression.  With tax revenues dead in the water, these additional reaches for cash may help kick the can down the road in the short term – but without sustainable economic growth to boost tax receipts in a more permanent manner, they are going to be in some real trouble, perhaps real soon.

Further reading: Here’s a cool, interactive chart of state budget gaps.

Ed. Note: I write a bi-weekly guest column for Accounting Today’s young professional blog called Accounting Tomorrow.  Here are a couple of my recent columns if you’re in the accounting profession and would like to check them out: