State & Local Tax Blog

What Did The Mayan Calendar Say About State Taxes in 2012?

There’s no indication that Nostradamus or the Mayans predicted anything state tax wise for 2009 , but we can make predictions based on how the economy is going.

Trouble in CA

We all know that California is in deep fiscal trouble. Back in July, 2009, CA was unable to meet its bills for the second time this year and the state started issuing IOUs. In fact, as reported by CNNMoney.com at the time, some 28,750 IOUs worth $53.3 million were to have been issued initially, mainly for personal income tax refunds. CNN said this at the time: “The state’s fiscal condition is disastrous. Officials passed a budget in February, but declining tax revenues have opened up a $26 billion deficit.”

California is in trouble, no doubt. But according to a study by the Pew Center on the States, so are 9 other states. It’s interesting to look at what states are named and to consider what impact this will have on state taxes.

 
9 Other States in Trouble
As the Pew Center reports: “California’s financial problems are in a league of their own. But the same pressures that drove the Golden State toward fiscal disaster are wreaking havoc in a number of states, with potentially damaging consequences for the entire country.”
This examination by the Pew Center on the States looks closely at nine states, in addition to California, that are particularly affected by the recession.

All of California’s neighbors–Arizona, Nevada and Oregon–and fellow Sun Belt state Florida were severely hit by the bursting housing bubble, landing them on Pew’s list of states facing fiscal difficulties similar to California’s. A Midwestern cluster of states comprising Illinois, Michigan and Wisconsin emerged, too, as did the Northeastern states of New Jersey and Rhode Island.According to the Pew report, other states — including Colorado, Georgia, Kentucky, New York and Hawaii — were not far behind.

States Face Other Huge Problems
Almost at the same time, the Center on Budget and Policy Priorities chimed in also forecasting that States that face a serious fiscal problem could be forced to institute additional deep budget cuts and tax increases in 2010. Obviously, the recession is going to affect income tax receipts and decreased purchases are going to lead to lesser sales tax receipts. But as states plan their budgets for fiscal year 2011 which begins in July for most states, they have to take into account another reduction as they make their plans. According to the Center, “the federal assistance that states received for their Medicaid programs under this year’s economic recovery legislation is scheduled to end with a “cliff” on December 31, 2010, and the assistance states received for education and other services also will be largely exhausted by then. Although that date is more than a year away, the problem is coming to a head now.”

 
In contrast to the federal government, nearly all states have a statutory mandate to balance their budgets. They can’t operate in a deficit. They must cut costs or raise revenue or both. Cutting services seems to be nearly impossible politically for state governments. Raising taxes is almost as difficult, but not impossible. It’s easier to expand the tax base than it is to raise the tax rate.
 
Our Predictions
You don’t have to be Nostradamus or understand the Mayan calendar to predict that taxes are going up.
 
Here’s our specific predictions for the income tax. We expect that most states will not increase the marginal rates, but they will change the brackets. As a result, more people and companies will be paying income taxes that were before.Texas is not one of the 10 states in “fiscal peril” but it is a good example. It used to be in Texas that there was no corporate income tax and it was fairly easy to avoid the franchise tax. Now there is a new franchise tax and it taxes every form of business. It’s a very onerous taxing scheme that only now is starting to hit people. The rate is very low this is true, and most small businesses do not pay any tax, but now that the structure is in place, it’s easy to change the thresholds.
 
Also, income tax audits will increase. It’s difficult to raise rates or change thresholds, but if the auditors can find more revenue, that’s a win for legislators. More revenue and the state revenues take all the heat. In Texas, they hired 155 new auditors to focus on their new franchise tax. And the inside word is that in fact all 600 or so Texas auditors will be trained in auditing the franchise tax. This tax is so complicated that, if anything, companies are underpaying. Look for a huge ramp up in audit activity, not only in Texas but everywhere and especially in these 10 states.
 
In the sales tax, we fully expect to see an expansion of the base. Look for more services to be taxed. There is still significant opportunity in many states to tax many more services. Also, it is possible that states will make an attempt to increase the rates. At 7 and 8%, lawmakers might think they have some room to raise rates. They’d have to make a big case to do it, but we wouldn’t be surprised to see rates increase in some states.
 
We also fully expect states to increase their sales tax audit activity. This is a proven revenue driver. So it makes sense to hire more auditors.
 
Nexus will be Big
And what is the best situation of all for auditors? They find lots of money from companies not based in their state. Especially from companies not previously registered. So expect a tremendous effort to find companies from other states doing business in the auditors’ states. Printers will be burning up producing all the nexus questionnaires.
 
The world may not be ending in 2012, but rough times are ahead when it comes to state income and sales and use taxes.

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