The tax battles that ravaged many state and local elections on Nov. 6 are the start of a new wave of popular tax revolt. Twenty-six states have raised taxes this year with no major reductions, reports the National Conference of State Legislatures.
The net increase is $7.6 billion for fiscal 1991, more than in any year since 1983 when the economy was winding up the last recession. And still state treasuries are gasping, as their local economies decline.
The new federal tax law isn't drawing such ire -- principally because it appears to leave most taxpayers alone. Its major target was the 2.3 percent of Americans who earn more than $100,000But just because the federal law may not make much difference to you directly, don't overlook its indirect hand on the size of the state tax you will pay.
Congress has just passed major new responsibilities over to the states, especially for Medicaid. The federal government puts in about 55 percent of Medicaid's costs, while the states pick up the rest.
But pick it up with what? The states either will have to raise more taxes, to cover the new programs dropped upon them, or plunder some of their ongoing programs. A few initiatives Congress has offered the states are optional, but most are mandatory. New state money must be found.
Some new money will be coming to more than half of the states as a windfall. They'll collect from the same higher-income people earning $100,000 or more whose federal taxes are going up.
That's because these states piggyback their own income taxes on the federal tax return. So if you pay more to Washington, you will owe more to your state treasury, too. The states will be working to establish their linkages, says Marcia Howard, research director of the National Association of State Budget Officers.
Even more states got a windfall after Congress passed the Tax Reform Act of 1986. But back then, angry taxpayers forced all but three or four of the states to give rebates or reduce their rates.
This time it's different. "If the next fiscal year is anything like this one, the states will need money desperately, and will try to keep it," Howard says.
The principal add-on to state finances will be mandated medical services for children of the poor. Right now, they're covered up to age 6. Each year the age will move up until they have full health protection to age 19.
States will also be required to act as a "Medigap" insurer for the aged poor, covering the deductibles, co-payments and Medicare Part B premiums that Medicare doesn't pay. For those just above the poverty line, only Part B premiums will have to be covered. There are other Medicaid mandates, too.
To help pay these costs, the new law helps the states save some money on prescription drugs, says Gail Wilensky, head of the federal agency that administers Medicaid and Medicare. The new law sets up specified discounts that manufacturers will have to offer. But even here, the savings may not be as great as they sound: The states that have offered a limited number of prescription drugs will now have pay for a wider pharmacopeia.
And in their search for money, the federal government has poached on a major state funding source. About 16 percent of state revenues comes from excise taxes. "Can you imagine a state raising a gasoline tax next year?" asks Jim Martin of the National Governors' Association.
But if not, how will Medicaid and other responsibilities be met?