Few would envy the position most state lawmakers now find themselves in. Nearly every state is required to balance its budget each year and the vast majority of states face substantial budget deficits in the coming years. Those lawmakers will have to support either cuts in essential public services or increases in politically unpopular taxes -- and do so in the midst of a deepening recession.
Under these circumstances, the best way to eliminate state budget deficits is through tax increases on upper-income individuals and families, as such changes would reduce consumer demand the least. Three states in the northeast -- New York, Connecticut, and Delaware -- seem ready to do just that.
In the Empire State, Governor David Paterson and members of the legislative leadership this week reached agreement on a plan to close a $17.7 billion budget gap. The centerpiece of the plan is the addition of two new tax rates. A rate of 7.85 percent would apply to income in excess of $300,000 and a rate of 8.97 percent would apply to income above $500,000. While those changes would only be temporary in nature (lasting only through 2011) they are expected to bring in about $4 billion per year in revenue.
In the Nutmeg State, budget deficits are projected to total $8.7 billion over the next two years. In response, the Assembly's Finance Committee approved legislation that, among other changes, would add four new income tax brackets, with rates ranging from 6 percent to 7.95 percent, all affecting married Connecticuters with incomes over $250,000 annually (and single taxpayers with incomes above $132,500).
Finally, in the First State, Governor Jack Merkell has put forward a broad-ranging budget plan that would take the constructive step of raising Delaware's top income tax rate from 5.95 percent to 6.95 percent, the first income tax increase since 1974. Even though it would impose pay and benefit cuts on state employees and rely more heavily on gaming and excise tax revenue, this budget plan is a step forward on progressivity.