Arizona Policy Choices

Balancing Acts: Tax Cuts and Public Policy in Arizona

States Are Cutting Taxes Unless You Smoke

Ann Reilly Dowd, MONEY
© MONEY, June 1997

While the folks in Washington continue to bicker over tax cut details, your state may have some tax relief in store for you in 1997 and '98 if you're married, a homeowner, a student or elderly. But if you're a smoker, you're about to get burned. An exclusive MONEY survey of the 50 states and the District of Columbia finds the wave of tax cutting that swept the states during the past two years is likely to continue in about half the states, propelled by still robust revenue growth. However, expect a strong undertow of tax increases aimed at discretionary items, particularly cigarettes. Twenty states are enacting or are likely to enact new tax cuts this year and next, while six are planning hikes. Another eight are likely to do both; 17 are doing nothing. Here's what to watch for where you live:

Income tax cuts. This year, relief comes in many different forms. If you live in Maryland, your top personal income tax rate will drop 1 percent a year for the next five years, while your personal exemption will gradually double to $2,400 starting in 1998. Connecticut and Rhode Island are also considering across-the-board income tax cuts. Arkansas, Kansas and Mississippi are equalizing the tax rates or exemptions paid by married and single people.

Still other states want to help the elderly. For instance, if you're retired and living in Connecticut, Republican Gov. John Rowland has proposed exempting your Social Security benefits from state taxation. And New Yorkers over age 70 can now deduct as much as $2,500 of the cost of their long-term-care insurance premiums.

Property tax reductions. Kansas recently voted to use its $175 million budget surplus to eliminate state taxes on the first $20,000 worth of property owned while cutting the property tax rate by 23 percent. Meanwhile in Texas, the legislature plans to dole out roughly $2 billion in local residential property tax relief. Voters in New Mexico and Oregon will find Proposition 13-type property tax limitations referendums on their ballots this year and next.

Education incentives. Beginning next year, all Maryland residents will be able to put away as much as $133 a month toward tuition at a four-year college in new tuition-savings plans whose earnings will grow free from state and federal taxes until withdrawn for college. Then the money will be taxed at the student's low rate. In Minnesota, Republican Gov. Arne Carlson has proposed a $1,000-per-child tax credit; for elementary and secondary education expenses for families earning $39,000 or less and a $1,950 deduction for families earning more.

Sales tax creep. "States are expanding the sales tax into services," says University of Georgia law professor Walter Hellerstein. "It's politically easier in some states to add one more category to the sales tax than to raise tax rates, which affect most taxpayers immediately." This trend generally concerns business services but hits consumers as well. For instance, the Texas House has voted to extend the state's sales tax to services such as auto repairs and car washes.

Gasoline and so-called sin taxes on items like cigarettes and alcohol are on the rise too. If you live in Utah, your gas taxes will increase 5 cents this year to 24 cents a gallon. Illinois, Oregon and Vermont are also considering gas tax hikes. Texans may pay higher taxes on alcohol.

But the biggest tax losers this year will undoubtedly be smokers. If you live in Utah, you'll soon pay 25 cents more per pack of cigarettes, for a total tax of 51 & 1/2 cents. At least seven other states are considering or have upped puff taxes. The biggest is Alaska Democratic Gov. Tony Knowles' proposed $1 increase, raising the tax to a hefty $1.29 per pack, to fund children's health care and an antismoking campaign. "Cigarette tax increases are as popular today as no-smoking buildings," says Sally Adams, the state tax expert at CCH Inc., an Illinois-based research group. "They are one of the few tax hikes the electorate will tolerate."


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Morrison Institute for Public Policy