States facing stiff opposition to tax increases

By late in the evening of Sept. 9, residents of Alabama – historically one of the least-taxed states in the nation – knew they had voted down a $1.2 billion tax increase by a 2-to-1 margin.

Just over a week earlier, thousands of miles away, Oregon lawmakers learned that a recently approved $800 million tax increase was facing obliteration in a petition drive.

Maine is just one of many states facing budget deficits much larger than those that occurred during the economic slowdown of the early 1990s. As states face these deficits, voters are increasingly demanding that politicians balance budgets without raising taxes.

In Alabama, the anti-tax group Citizens for a Sound Economy rallied opposition to Republican Gov. Bob Riley’s plan to restructure the state’s tax code. The plan, drawn up to cover shortfalls estimated at around $675 million, would have increased income taxes for wealthier residents and raised the income-tax exemption threshold for lower-income residents. Property and sales taxes also would have gone up. In addition, the plan would have set up a college scholarship fund and reformed Alabama’s tax system, which features a 9 percent sales tax rate and charges personal income tax beginning at $4,600 of income.

Small-business owners were furious that Riley wanted to raise the sales tax rate and, for the first time, apply the tax to warranty and service contracts and labor costs for product installations and repairs, said Brenna Hapes, a spokeswoman for the Washington-based anti-tax group.

Middle- and upper-class residents were angry that the governor wanted to significantly raise property taxes. Property in Alabama is now taxed at a fraction of its value; if the plan had passed, property would have been taxed at 100 percent of its worth.

Members of the anti-tax organization point to the state’s new budget, in which legislators slashed services but did not release prison inmates (which the Riley administration threatened to do if the governor’s plan failed), as proof that budgets may be balanced effectively without a tax increase, Hapes said.

“The voters have proven that, despite the economy, they don’t want their taxes raised,” she said.

The group has now targeted Oregon, where lawmakers recently passed an $800 million tax increase to balance the state’s budget. Organizers there have until Nov. 25 to collect the just over 50,000 signatures necessary to force a referendum on the tax increase.

Other anti-tax activists have started a similar drive in Nevada, where they hope to overturn much of the $836 million tax increase approved by legislators in July.

Lawmakers have seen state deficits jump because of a decline in tax revenues and federal grants, as well as a shift in health care costs from the federally-funded Medicare program to the state-funded Medicaid program, experts said.

Throughout the country, states faced combined deficits of over $78 billion for the coming fiscal year, according to the National Conference of State Legislatures.

Of the first 42 states to pass 2004 budgets, four states – Delaware, New York, Ohio and Idaho – increased taxes by more than 5 percent, according to the conference. The four were among 17 states that raised taxes by more than 1 percent to fill budget gaps.

States that did not increase taxes to compensate for deficits did so by cutting spending. Some did both.

California, which now faces a projected $8 billion budget deficit, cut general fund spending by about 13 percent from 2002 to 2004, said Nick Johnson, director of the State Fiscal Project at the Center on Budget and Policy Priorities in Washington, D.C. Legislatures in Alaska, Maryland, Oklahoma, Utah, Wisconsin and South Carolina also made significant general fund cuts in their 2004 budgets, he said.

Minnesota, which restructured its tax system in 2001 so that the state funds over 80 percent of K-12 education, cut funding to most state agencies by 15 percent.

Other states have postponed their budget problems by funding deficits with “one-time money,” such as redirecting tobacco settlements to state agencies or selling state property, Johnson said.

Illinois plans to sell the State of Illinois building in Chicago to alleviate deficits. State employees will not leave the building, however, as it will be leased back to Illinois by the buyer over a period of 20 years.

Legislators in Alabama, after voters annihilated Riley’s tax plan, passed a budget that resulted in thousands of layoffs.

Because 90 percent of Alabama’s tax revenue is earmarked for use before its receipt, lawmakers cannot shift funding from one agency to the next, said James Williams Jr., executive director of the Public Affairs Research Council of Alabama at Samford University. That means when tax revenue declines, cuts tend to be irregular.

For example, the state just cut most general fund agencies by 18 percent – yet the Highway Department will add 1,000 jobs this year, Williams said.

Alabama residents force lawmakers to earmark tax revenue because they do not trust politicians, he said, which is also one of the major reasons Riley’s plan was voted down.

A large chunk of the revenue generated by the tax increase would not have been earmarked, a fact anti-tax organizers played on to mobilize low-income voters against the tax.

“People don’t trust the state,” Williams said. “And then it treats them unfairly in taxes. The state has taxed people unfairly for a long time.”

Recent polls have shown that residents in Oregon and Nevada will likely vote down their respective tax increases.

Johnson said the fact that some states are having a hard time selling tax increases, even with looming deficits, is a symptom of widespread frustration over economic instability.

“In difficult economic times, voters get frustrated with their elected officials,” he said. “One of the ways they can take (their frustrations) out on them is by denying a tax increase.”

Staff Writer Elbert Aull can be contacted at 791-6335 or at: