The economic climate that individuals, corporations and businesses have been feeling has also hit state and local governments in a big way. Most states will be addressing huge budget deficits during the 2009 legislative cycle with limited options.
Although Nevada is one of the states with a budget deficit that must be resolved in coming months, Governor Jim Gibbons will introduce his budget this month without any new tax increases: No corporate taxes, no personal income taxes, and no new property taxes. Nevada’s Governor is, apparently, alone in his approach to dealing with budget problems. He insists on cutting state spending until they meet the existing revenues.
Other states, however, are not so lucky. Last month, the California legislature came dangerously close to circumventing constitutional protections against new taxes when Gov. Schwarzenegger refused to sign a bill with $9.3 billion in new taxes, disguised as “fees.” The bill was given to Gov. Schwarzenegger for his consideration, even though the bill did not pass with the constitutionally-required two-thirds majority.
California has a real problem. According to the non-profit Tax Foundation, California already has the third highest individual tax rate (topping out at 9.3%) described as “the most burdensome in the nation” - not counting an additional surtax of 1% for millionaires. California’s business tax climate is equally bad - 47th in the nation - when factoring income, sales, unemployment insurance and property taxes. The per capita tax burden in California is $5,028 - that is, for every man, woman and child!
This incredible tax burden is having its consequences - in a bad way. Since the state imposed the additional 1% tax on incomes over $1 million, the number of millionaires in Los Angeles County alone dropped by 7,000 households. During this same period millionaire households nationwide increased an average of 5.9%. Where did these millionaires go? Nevada has been one destination.
The coming year will see dramatic increases in the state taxes in many states. The Washington Times reported that governors are proposing higher taxes on clothes, soft drinks, gasoline, auto registration, drivers licenses, and other items that impact low- and middle-income families.
In New York, Governor David A. Paterson has proposed a 137 new or increased taxes, including an 18% “anti-obesity tax” on non-diet soft drinks. Other taxes and fees hit satellite TV, cigars, higher tuition fees, beer, car rentals, shoes and professional licenses. Combined, these fees propose to raise $4 billion.
In Oregon, Gov. Kulongoski is balancing the budget on higher taxes for hospitals, health insurers, cigarettes, gasoline, vehicle registrations and corporations. All totaled, at least 38 states are anticipating budget deficits totaling approximately $80 billion, with this number likely to grow. The Center on Budget and Policy Priorities estimates that this number may reach $145 billion by 2010.
According to the Cato Institute, “states should have been retrenching after budget increases of 7 percent over the last two years, but they repeated the same mistakes they made in the late ‘90s, assuming the good times were going to last forever.” Chris Edwards, Director of Tax Policy Studies for the Cato Institute, points out that a report by the National Association of State Budget Officers showed that spending across the 50 states increased 6.5% in 2005, 8.7% in 2006, 9.3% in 2007 and 5.1% in 2008.
The real question is, how will the states close the gaps? Unfortunately, those gaps are likely to be closed by raising your state tax bill. This reality makes state tax planning an imperative part of your business strategy. Now, more than ever, incorporating your business in Nevada makes economic sense.
