State Tax Collections Up, So Where's the Money?

Feb. 8, 2006 — -- Census Bureau data shows a sharp increase in state tax collections, which has some observers asking, Where's the money?

Tax experts were not surprised by Census Bureau data that showed U.S. state taxpayer burdens climbed 41 percent between 1994 and 2004, due in part to rising education and Medicaid costs.

The census data numbers do not include federal or local taxes, which in many states account for a large portion of tax collection.

The economic downturn after 9/11 played some part in boosting state tax levels, as did the tax cuts enacted by President Bush in 2001 and 2002.

Tax collections fell sharply in 2002 and continued a downward trend in 2003. States took a variety of steps to raise their revenues, including some tax increases.

"When budget times are tight, like they were in 2001 after 9/11 and after the economic downturn, states will raise taxes," said John Berthoud, president of the National Taxpayers Union, a nonprofit group that supports lower taxes.

Some states "uncoupled" their taxes from the federal tax system after the Bush tax cuts, meaning that individual state taxes, which were in part previously determined as a percentage of the amount of federal taxes owed, moved to a more independent system. Some states also made minor changes, like instituting state estate taxes and putting state regulations on the rates at which businesses could depreciate the value of their equipment.

A smattering of tax increases resulted in a 1.7 percent to 1.9 percent increase in state taxes nationwide in 2003 and 2004, according to statistics compiled by the National Conference of State Legislatures. That is a much smaller boost than was seen after the most recent recession in 1991, when NCSL data showed a 5.4 percent year-over-year tax increase.

But even though the increases were small by historical standards, the ramp-up after the 2001 recession, coupled with a quicker-than-expected economic recovery, has bolstered coffers in some states.

"Any tax increases that did pass after the remarkably low collection in 2002 are contributing to the increased collections now," said Bill Ahern, of the Washington-based Tax Foundation, a watchdog group that has monitored tax policy since 1937.