State Tax Actions 2005

State revenues rebounded with the rejuvenating economy in 2005, decreasing the need to find new tax sources. States raised $3.4 billion in net new taxes in 2005, down from $4.1 billion in 2004. The aggregate tax increase accounts for 0.6 percent of the previous year’s tax collections, compared with 0.8 percent a year ago. Tax actions in 2005 mostly affect fiscal year (FY) 2006 tax collections.

Major natural disasters in the Gulf Coast region and growing attention to consumer energy costs and property taxes prompted some states to reconvene during the year to consider further changes to state tax policies. This report includes tax actions taken during regular and special sessions in 2005, as well as any actions approved by voters in fall 2005 elections. All 50 states provided information.

• In the personal income tax category, states cut aggregate taxes, resulting in a decrease of $577 million. This halted the recent trend of net tax increases.
• The largest tax change occurred in sales and use taxes, with net revenue increases of $1.9 billion accounting for 55% percent of the tax increases passed by the states in 2005.
• Corporate income taxes increased overall as many states made changes, resulting in a $243.1 million revenue gain for FY 2006.
• Tobacco tax increases, continuing a recent trend, were significant, with eight states raising $1.2 billion in new taxes on tobacco products.
• Taxes on alcoholic beverages will generate $69 million in FY 2006.
• Health care tax assessments increased overall by $446 million, primarily due to tax changes affecting health providers.
• Voters in Colorado allowed the state to retain revenue above the constitutional fiscal limit in lieu of projected refunds. Washington voters endorsed a gas tax increase for transportation.
• Motor vehicle tax changes will raise $113 million.
• Miscellaneous tax changes will increase state revenues by $29.7 million in FY 2006.

In addition to tax changes, states made other nontax changes, such as fee increases and revenue accelerations or decelerations, for a net increase of $896 million. This results in a total revenue increase of $4.3 billion, which is $1.6 billion below the $5.9 billion total increase in 2004.