Three States Buck Tide by Eyeing Tax Hikes

At a time when governors and legislators across the nation are swimming in surplus revenue and striving to outdo each other in fashioning politically attractive tax cuts, Alaska, West Virginia and Maryland are going against the tide by considering significant tax hikes.

In the most noteworthy case, Alaska Governor Tony Knowles, a Democrat, is mulling over a plan to enact both a personal income tax and a statewide sales tax to address the state’s projected $900 million Fiscal Year 2000 budget shortfall. The budget gap is projected to hit $1 billion in Fiscal Year 2001 because of low oil prices.

“We know that beginning July 1, we’re on a billion dollar countdown,” Knowles said in an interview with the Anchorage Daily News. “The clock is running. We will need some action this legislative session.”

Cecil Underwood, West Virginia’s Republican governor, surprised his state with a tax proposal designed to address public health issues. In neighboring Maryland, Democratic House Speaker Casper Taylor has been floating a plan to raise key taxes in an effort to put aside money for looming road construction and mass transit outlays.

While Maryland enjoys a budget surplus approaching $250 million, most of the money is already earmarked for school construction and other non-transportation projects. Taylor said the current bright general fund picture offers a unique opportunity to address current and future transportation funding needs.

Alaska’s vulnerability to shifting oil prices has resurfaced as a big state headache in recent months as oil prices hover around $10 a barrel. About three-quarters of revenue going to the Alaska general fund is produced by oil taxes and royalties.

Knowles has not announced specifics of his plan for addressing the state’s prospective deficit, but will provide details in his combined State of the State and budget address January 20.

Anticipating legislative resistance from Republican leaders, Knowles has already rejected using the earnings reserve of the Alaska Permanent Fund or withdrawing funds from the constitutionally-mandated Budget Reserve Fund to achieve his goal of balancing the budget by 2001.

The state’s vast oil revenues are invested in the Alaska Permanent Fund, an inviolate trust officially belonging to the people of Alaska. The fund, managed by the Permanent Fund Corporation, was established in 1976 and pays an annual dividend to each Alaska resident. The 1998 payout of $854 million was the largest in state history.

Alaska’s personal income tax was repealed in 1990. The possibility of restoring it was last considered in 1996, but oil prices rebounded, permitting Knowles to shelve the idea.

In contrast to Alaska’s budget crisis, West Virginia’s proposed tax action is aimed at bolstering children’s health insurance programs.

To generate funds for this purpose, Underwood proposed a statewide 25% excise tax on smokeless tobacco in his January 13 State of the State address.

“While I have opposed any general tax increase, I believe West Virginia should tax smokeless tobacco,” he said. “Excessive use of these products leads to high incidences of tobacco-related diseases, especially among young people. Of the projected $7 million in income, $5 million should be used to underwrite children’s health insurance, $1 million to offset medical school underfunding a year ago, and $1 million for a revolving loan fund to buy equipment for rural health centers.”

In a similar move, Democratic Maryland Governor Parris N. Glendening is expected to include a two-year $1 increase in cigarette taxes in his proposed budget. Such an increase is likely to pass, as Glendening has tied the tax to budget money for legislators’ home district pet projects.

If Underwood and Glendening prevail, their states would join Michigan and New Jersey as the only states to raise tobacco taxes in the past two years, according to the National Association of State Budget Officers.

West Virginia’s legislative leaders expressed a mixture of surprise and skepticism at Underwood’s plan. Senate President Earl Ray Tomblin, a Democrat, expressed amazement that a Republican governor would propose a tax increase and said there was a chance that half of the 25% tax would pass the legislature, the Charleston Gazette reported.

House leaders gave the proposed tax hike a better chance of passing in their chamber. House Speaker Bob Kiss (D) said that while the legislature has not raised taxes in the last five years, a tax on smokeless tobacco has strong support in the House.

If the legislature does not pass the tax, Underwood’s proposed budget would face a $7 million shortfall, as projected revenue from the tax was already included.

Unlike Alaska and West Virginia, any contentious tax hike in Maryland is likely to originate in the legislature, though almost certainly with the governor’s support.

A committee of legislators, transportation officials and business leaders has determined that an additional $200 million per year is needed for the state’s special transportation fund to keep pace with current and anticipated needs. The fund draws its revenues from the state gas tax, motor vehicle fees and federal aid. If Maryland cannot come up with its share of the funding, the state will not receive its full federal transportation allocation.

Maryland’s gas tax was last raised in 1992 to 23.5 cents per gallon and provides the biggest portion of transportation funds. While Glendening has agreed with Taylor on using a gas tax increase to fund transportation, other legislators have advocated increasing the state sales tax rate from 5% to 5.5 or 6 percent.

Senate President Thomas V. Miller, a Democrat, staunchly opposes raising taxes at a time when surplus funds are on hand and has promised a bitter battle. With key members of the same political party divided on such a fundamental issue, the 90-day Maryland general assembly session, which began on January 13, could be quite acrimonious.