California the tax increase leader for 2009

California led the nation in tax hikes in 2009, a year in which 24 states boosted taxes to cope with recessionary budget woes, according to a report from the National Conference of State Legislatures (NCSL).

The Golden State raised about $11 billion in new taxes, largely due to a temporary 1 percent boost in the state’s sales tax. New York trailed California’s windfall with $6.9 billion in projected tax increases.

In total, about $28.6 billion in fiscal year 2010 revenues are expected from tax increases nationwide, compared with $3.8 billion from tax adjustments in 2008. Personal income tax increases amounted to the single biggest jump, according to the report, bringing in $11.4 billion in new revenues.

While last year's increases will amount to the largest rise in state revenue from new taxes since 1991, tax analysts say it’s unlikely that cash-strapped states will forgo boosting taxes anytime soon, as at least 41 states face midyear budget shortfalls.

“As states are still struggling to balance budgets, they are taking a real close look at their revenue systems,” says Bert Waisanen, a fiscal analyst at the NCSL.

In fact, some analysts expect that legislators around the country may eclipse 2009 tax hikes with increases this year.

“I think it’ll be worse in 2010,” says Joseph Henchman, tax counsel and director of state projects for the Tax Foundation. State revenues typically lag about two years behind the national recovery from a recession, he says.

What’s more, he says, revenue assumptions at the state level are often overinflated, leaving many states, like California, scrambling to plug budget gaps. “For a state like California that just has negative numbers, that new revenue coming in won’t fix the structural problems,” he says.

While half the nation saw state taxes climb, the other half saw no changes at all. Only North Dakotans saw a slight dip in state taxes. “The key for states has been to prioritize and that’s what some states have been able to do,” says Mr. Henchman.

In many states last year, lawmakers raised personal income taxes, which are typically seen as a last resort for politicians.

“Historically, the income tax is the last thing that politicians turn to in bad times,” says Henchman. But, he says, state lawmakers have succeeded in making income tax increases more palatable to voters last year by applying them only to high-income earners.

Still, he says, that can create problems down the road when those same state lawmakers look to the wealthy to create new business.

While California and New York led the nation in new tax revenue, there were also increases of $1.3 billion in Florida, $1.2 billion in New Jersey, and $990 million in North Carolina. Fifteen states raised income taxes, 20 hiked business taxes, five raised alcohol taxes, and 18 states raised taxes on cigarettes.