Will States Hold the Line on Tax Hikes? History Says No
Numerous governors and state lawmakers raced to election victories last fall on promises to cut government spending and not raise taxes.
But if those newcomers do in fact stick to their no-new-tax pledges during today's dire times for state budgets, they'll be bucking the recent historical trend.
An analysis by the National Conference of State Legislatures shows that states have tended to respond to recessions by raising taxes, as they scramble to replace lost revenue and sustain state spending on things like K-12 education. States' revenues tend to recover slowly from the revenue lost during recessions, increasing the pressure for tax hikes during the years after they have officially ended.
At the same time, while state tax hikes typically follow recessions, legislators often try to put off those hikes as long as possible, explained NCSL's Ron Snell in an essay outlining his organization's analysis. Elected officials worry that tax hikes will harm consumers and businesses already coping with shrunken incomes. They also worry about being accused of overlooking their constitutents' economic woes, Snell says—or accused of overreacting to revenue losses, which might otherwise be overcome by trimming spending.
NSCL examined three major sources of state tax revenues: personal income, general sales, and corporate income. It looked at states' behavior from the late 1980s through today, a period that included the last three recessions. During each of those downturns, states at some point collectively raised taxes, as measured as a percentage of their previous year's collections.
Take the recession of 1990-1991. In 1990, state lawmakers responded to falling revenues by increasing taxes by an average of 3.4 percent. In 1991, as budget conditions worsened, they enacted the largest collective state tax increase on record, 5.4 percent, which took effect in fiscal 1992.
In the years following the relatively brief recession of 2001, legislators also approved relatively modest tax increases, averaging about 1.6 percent, NCSL found.
And during the "Great Recession," which lasted longer than its two predecessors combined, legislators in 2007 and 2008 approved relatively small tax hikes. But the depth of revenue shortfalls caused by the recession had become obvious by 2009: State funds having been knocked back to 2004 levels. Legislatures responded that year by passing the largest tax increases since the downturn of the early 1990s.
Of course, the pendulum swings the opposite way when times are good. When the economy is chugging along nicely, NCSL points out, states typically respond by cutting taxes.
What does all this mean for the next couple years?
Many states, particulary those with Republican governors and legislatures, are vowing to hold the line on spending. In some cases, they're demonstrating their resolve by proposing substantial cuts to K-12, which traditionally has been insulated from budget reductions in the past.
It could be that states already have most of this recession's tax increases out of their system. Or governors and lawmakers could fear the political consequences of enacting them—even if their states really could use the money—and going back on their word.