Pity The Poor Taxpayer

In California, Republican Governor Pete Wilson engineered the biggest tax increase in the state's history, dwarfing even Ronald Reagan's 1967 tax hike. In Pennsylvania, lawmakers duked it out on the floor of the legislature over the state's largest-ever tax hike. And in Connecticut, the government shut down while Governor Lowell P. Weicker Jr. and the legislature battled over inflicting a state income tax for the first time.

While Washington blithely ignored the national deficit, governors and state legislators spent the spring and summer in the ugly business of balancing budgets. And now that they're about done, the debris of no-new-tax pledges litters statehouse lawns across the country. A handful of states are still wrestling with 1992 budgets, but so far this year, at least 33 have raised more than $17 billion in new taxes. And the hikes have been surprisingly nonpartisan: Republican Wilson in California, Democratic Governor Robert P. Casey in Pennsylvania, and independent Weicker in Connecticut all took the lead in state tax-raising efforts. Says J. Phil Carlton, executive director of the National Resource Center for State Laws & Regulations: "It's just a mad scramble to find new ways to raise money for state coffers."

It's happening not just at state capitols. Nearly 85% of all cities have raised taxes or fees in the past year, according to the National League of Cities. In the recession-ravaged Northeast, a startling 97.9% of cities raised levies.

FISCAL HITS. The recession has hammered some states harder than others, but all have taken a fiscal hit in the past year. For one thing, federal aid to state and local governments has been slipping for the past decade. At the same time, state spending for education and health care has ballooned.

It's no surprise that, over the last 10 years, state and local taxes have increased far faster than federal levies. In 1990, state and local governments collected more than $500 billion in taxes. That's more than 9% of the nation's gross national product--and it's nearly 10% higher than the level a decade ago and more than double the share of GNP in 1970. By contrast, the federal tax take has hovered at 19% of GNP for the past four years and is still well below its peak of more than 20% in 1981.

For most of the Roaring `80s, new demands on states and cities weren't a problem. Surging consumer spending and real estate values pumped up revenues and bankrolled all the new chores. The recession has burst the revenue bubble. "The revenues were flowing in the `80s," says Jeffrey L. Esser, executive director of the Government Finance Officers Assn. "Now, the responsibilities are still there, but the money isn't."

So governors and mayors are struggling to find the cash they need. Many states, including Maine, Vermont, and North Carolina, have either raised personal income tax rates or put heavy temporary surcharges on individual taxpayers. Others, such as Missouri, have hiked broad-based business taxes. Nevada, which prides itself on having no corporate income tax, adopted a "business privilege tax." Based on the number of employees, the levy could cost a company operating in the state as much as $400,000 a year. New York and Minnesota, among others, have enacted less far-reaching business tax increases. And cash-strapped Pennsylvania and California have tapped both individuals and companies in a big way (table).

But from Maine to California, sales taxes have been the hike of choice. Not only were tax rates raised but the number of products subject to new levies has also skyrocketed. In the coming year, you'll be paying taxes on Evian in California, doughnuts in Maine, ZZ Top tickets in Texas, and pizza in Pennsylvania. Says Douglas L. Lindholm, a state tax policy analyst at Price Waterhouse: "The primary focus this year has been expanding the sales tax base."

Sales taxes, the second-largest source of state and local tax revenue after property levies, are an easy way to raise big bucks. But the recession has shown that a tax regime based on sales and property taxes is highly vulnerable to a downturn. Consumer sales drop, property values plummet--and expected revenues vanish. The result: more tax hikes.

Not every state raised taxes this year. In Massachusetts, a Republican political newcomer, Governor William F. Weld, was able to keep his no-new-taxes promise. But the cost was high: He cut spending for state welfare programs and slashed aid to cities and towns by 12%. His budget-balancing ace in the hole was $800 million in one-shot revenues, much of which came from selling state property and transferring debt off the state's books. Another one-time windfall: $200 million from shifting the cost of medicaid reimbursements from the state to the federal government. The gimmick, which is being widely used by states, has cost the federal government as much as $5 billion this year. Predictably enough, Budget Director Richard G. Darman has vowed to halt the practice.

VIDEO GAMES. The endless budget crunch will force states to keep scrambling for new sources of revenue. Lotteries will continue to grow. In Texas, the legislature not only raised taxes and fees by $2.1 billion but also put a state lottery on the November ballot. Up and down the Mississippi River, states are debating following Iowa's lead in allowing riverboat gambling. At this year's meeting of the National Conference of State Legislatures, vendors were showing off the latest in money-making gimmicks for states: video lotteries. Already these video versions of poker and blackjack are getting a hard look in South Carolina, Mississippi, and Iowa. Another hot new revenue-raiser: higher license fees for everyone from physicians to cosmetologists.

States are going to need those new sources of revenues. They're being squeezed by voters' resistance to traditional tax hikes and their demand for costly new services. In California, the epicenter of the 1970s tax revolt, hard-liners want voters to approve all future tax increases. "People realize that they have lost their right to vote, and they want it back," says Joel Fox, president of the Howard Jarvis Taxpayers Assn.

Unless the economy booms, the outlook for state and local governments is bleak. Those that dodged the fiscal bullet this year may have only put off the inevitable. In the face of voter opposition, the pace of tax hikes may slow in the next few years. But if it does, so will the level of government services. The states and cities have few options--they'll simply have to do less with less.

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