State Tax Hikes On Wealthy Proposed By California, Maryland Governors

This week, a pair of governors called for something that just two years ago might have been politically untenable: permanent targeted state tax increases on the rich.

First, Maryland Gov. Martin O'Malley called on the state legislature Tuesday to approve a tax hike on individuals earning $100,000 or more and couples taking in above $150,000.

Then on Wednesday, California Gov. Jerry Brown said his administration will attempt to place on the ballot a measure that could raise income taxes on those earning more than $250,000.

The governors' proposals are still far from becoming state tax policy. But their pitches might mark a turn toward strategies to shore up state budgets by imposing new taxes rather than the drastic cuts or temporary surcharges on the well-to-do that were commonplace during the recession, state finance experts say.

"It's early, but there does seem to be a bit of an uptick in governors proposing tax increases on the rich," said Jon Shure, director of state fiscal strategies at the Center on Budget and Policy Priorities, a Washington think tank. "The public is more receptive to that idea now. They have seen a few years of what cuts look like. They know what college costs after budget cuts are made. They know that there are certain days of the week you can’t go to the library or ... how many kids are in their child's class at school. And they don’t like it."

From the recession's beginning in December 2007 to its close in June 2009, state income tax revenues fell nearly 30 percent, according to Census data. Meanwhile, demand for social services, such as Medicaid, funded in part by state governments rose dramatically. This combination helped create yawning budget deficits in most states. Federal stimulus funds directed at state governments filled just 40 percent of the gap, according to a 2011 analysis by the Brookings Institution in Washington, D.C.

From 2008 to 2009, nine cash-strapped states passed temporary income surcharges on the wealthy. Most of these surcharges have expired, said Tracy Gordon, a Brookings Institution fellow.

The following year, state budget shortfalls helped sweep into office gubernatorial and state legislative candidates who promised to make deep cuts to state-funded programs and slash government staff, Shure said.

In 2011, governors in Minnesota and Connecticut did propose permanent tax increases on the wealthy. The Minnesota plan failed, but the Connecticut state legislature approved a spending plan that increased income taxes on almost anyone making more than $50,000 a year. The steepest income tax increase, from 5 percent to 6.7 percent, was reserved for those earning more than $500,000.

Late last year, New York Gov. Andrew Cuomo softened his stance on the state's so-called millionaire's tax, a surcharge on individuals earning more than $200,000 a year. Although as a candidate Cuomo had indicated that he would allow the surcharge to expire, he instead struck a deal with legislators. Their agreement will leave those earning $200,000 or more with a bigger tax bill than the one they had before the surcharge was instituted.

"I think it's hard to say that what's happened this week is a trend," Gordon said. "These calls for actual income tax increases on the rich may be a blip and may not go anywhere."

Public support for measures to increase the tax burden on wealthy households isn't new, said Frank Newport, editor in chief at Gallup, one of the nation's oldest polling organizations. "That's mostly because the vast majority of Americans don't earn anything near $250,000 a year. So, it's easy for them to say, 'Sure, government ought to raise their taxes.'"

The median household income in the United States was $50,221 in 2010, according to Census data. But the percentage of Americans who feel the wealthy don't pay their fair share of taxes fell from 77 percent in 1992 to 59 percent early last year, Newport said. Public support for taxing the well-to-do differently remains strong but is sliding.

At the federal level, efforts to institute new taxes on the wealthy have failed to gain traction, including the President's plan to use this revenue to create jobs. The full slate of Republican presidential contenders have also rejected the idea of targeted tax hikes on the rich. Shure suspects that the Occupy Wall Street movement has drawn public attention to issues such as income inequality and how much of the nation's wealth is held by a small share of the population. That conversation is changing the public's expectations, he said. But polls conducted late last year indicate that few Americans are sure of what Occupy Wall Street is or are clear about it's goals and messages, Newport said.

Governors may have now found the political courage to call for permanent tax increases on the wealthy because the notion that tax cuts and reduced government spending will stimulate the economy -- an idea rejected by many economists -- hasn't produced results, Shure said.

"For a while the prevailing idea inside government, particularly at the state level, seemed to be that you can create jobs if you just cut taxes and cut services," Shure said. "That's kind of like saying I can run faster if I just cut off my foot."

In August 2010, state and local governments estimated that declining property and sales tax receipts, and state and federal budget cuts would force municipal governments to slash as many as 500,000 jobs, a National League of Cities analysis revealed. The study also projected that public budget cuts would lead to additional job losses in the private sector. When governments stop buying supplies, hiring private companies to repair roads or oversee city projects, some companies can not longer afford their staff.

Still, some governors have proposed tax cuts this month -- even for the wealthy.

In Kansas last week, Gov. Sam Brownback announced plans to cut the state's income tax rate and eliminate taxes on many small businesses. To make up for lost tax revenue, Brownback also called for an end to all tax credits and wants to cancel a scheduled sales tax cut. The state's revenue office and critics said that if the plan is adopted, Kansas residents earning $25,000 or less will experience a tax increase while those earning more will not.

And on Tuesday, New Jersey Gov. Chis Christie has called for a 10 percent across-the-board tax cut and a sales tax increase. Some political pundits say this was an effort designed to shore up Christie's reputation as a fiscal conservative and position him for a possible 2016 White House run. Christie appeared on national television and radio shows Wednesday and held his first town hall of the year, using each occasion to describe his tax plan and its job-creating potential and position New Jersey as a venue attractive to businesses and individuals with higher incomes, the Associated Press reported.

"In this environment, the best way to compete is to show a different direction," Christie said.