July 29, 2009 / 8:38 PM / 10 years ago

Facing budget gaps, U.S. states shuffle tax codes: group

WASHINGTON (Reuters) - Caught with near-chronic budget shortfalls, U.S. states are scrambling to change their tax codes and bring in more revenues, the Tax Foundation said on Wednesday.

The foundation has compiled an annual index on 37 categories of states’ taxing and spending since 1937. This is the first time that it has had to update the report in the middle of the year.

“Many states have started the new fiscal year with tax codes that are vastly different compared to just a few months ago,” Tax Foundation President Scott Hodge said in a statement.

Hawaii, for example, has recently increased its top marginal tax rate to 11 percent, making it tied for first in the country with Oregon. New Jersey, New York, Wisconsin and Delaware also increased individual income taxes for high earners in recent months.

“It’s a bit of a troubling trend to see,” Mark Robyn, the foundation’s staff economist, said on a conference call with reporters. “One of the problems we see with taxing high income individuals is that high-income individuals tend to have volatile incomes.”

Their business and capital gains income fluctuate with the economy “even more than the average person’s income,” he said, adding they shy away from starting businesses in states with higher income tax rates.

On the other hand, Maine, North Dakota and Vermont have cut income taxes since January, the foundation found.

Ten states have pumped up their taxes on cigarettes, while four have increased sales taxes.

California raised its sales tax to 8.25 percent this year, the foundation said. The state, which finalized its budget this week after a drawn-out battle in Sacramento, also allows local governments to add to the sales tax.

In the Los Angeles area, five communities have sales taxes of 10 percent, according to the group.

California has also moved up one spot to No. 2 in the rankings of states with the highest gasoline taxes, as it has raised its levy to 39.9 cents per gallon from 35.3 cents. New York remains the state with the highest gas tax, with an increase to 42.5 cents per gallon from 41.3 cents in January.

According to the National Governors Association, U.S. states will likely face deficits totaling at least $200 billion over the next three years, and most are required to eliminate any gaps at the end of their fiscal years.

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