A handful of states raised income tax rates last year — particularly on the wealthy — as tax receipts suffered a historic plunge.
Stung by shrinking incomes and tumbling sales, states’ tax revenue has been plummeting even as they face higher demand for unemployment benefits and Medicaid.
State tax receipts sank 13.3% in the first three quarters of 2009, according to the Census Bureau. The drop was especially nasty in income taxes, which fell 20.1%.
Strapped for cash, at least nine states imposed higher taxes on the wealthy, either by raising the top marginal rate or by introducing new tax brackets.
New Jersey, which is confronting a budget deficit of as much as $11 billion next year, introduced a “millionaires tax” of 10.75% on taxable income over $1 million in 2009. The top tax rate in 2008 was 8.97%. The state also created two other tax brackets with higher rates.
The millionaires tax will likely be short-lived. Gov. Chris Christie, who took office last month, said he won’t extend it or the other two tax hikes enacted last year.
New Jersey’s income tax receipts sank 19.4% to $8 billion in the first three quarters of 2009, according to Census data. Income taxes contribute roughly 40% of the state’s tax revenue.
The state’s neighbor, New York, also introduced higher tax brackets, for incomes over $200,000, including an 8.97% tax on incomes over $500,000.
The Empire State, which is staring down an $8 billion budget gap for the upcoming fiscal year, suffered a 21.3% decline in income taxes through the first three quarters of last year, to $25.3 billion.
Heavily dependent on Wall Street for its revenue, New York derives more than half its tax receipts from income taxes.
Going into 2009, California had the highest state income tax rate in the country, at 10.3% for the top bracket. The Golden State — which faces an additional deficit of nearly $20 billion just after plugging a gap of $60 billion over three years — raised the rate even further in 2009, to 10.55%.
California’s income tax receipts plunged 27.1% in the first three quarters to $32.7 billion. Income taxes, which compose 47.5% of tax revenue, are lower than they were in 2005. Despite raising taxes, California lost its status as the state with the highest tax rate. Hawaii and Oregon each created a top tax bracket with an 11% rate in 2009. Oregon’s rate, approved by voters last month, applies to incomes over $250,000, and Hawaii’s applies to incomes over $200,000.
Connecticut created a new top tax bracket of $500,000, and taxed it at a rate of 6.5%. The previous top tax rate in the state was 5%.
Delaware raised its the rate for its top tax bracket, which applies to incomes over $60,000, to 6.95%, from 5.95%.
Also raising taxes on the wealthy was Wisconsin, which introduced a new bracket at the $225,000 income level, with a tax rate of 7.75%. The previous top rate was 6.75%, on incomes of $145,460 or more.
While North Carolina technically kept its marginal tax rates steady, the Tar Heel state imposed a 3% surtax on incomes above $150,000, and a 2% surtax on incomes between $60,000 and $150,000.
North Dakota was the only state with a significant change to its treatment of municipal bonds. The state eliminated a filing status that taxed the interest income on certain municipal bonds issued by other states. Fewer than 2% of taxpayers opted for that filing status. North Dakota now allows a single status, which does not tax municipal bonds issued out of state.
The nine states that imposed higher taxes on the wealthy represent 29% of the nation’s population and produce a third of the U.S. economy, the Census indicated.
Vermont and North Dakota took a different approach: they lowered taxes. North Dakota cut its top tax rate to 4.86% from 5.54%, and Vermont cut the top rate to 9.4% from 9.5%. Louisiana also effectively lowered taxes on some residents by raising the income level of the top tax bracket to $50,000 from $25,000.
All three states derive a lower percentage of their total tax revenue from income taxes than the national average of 36%.
