Using Income Taxes To Address State Budget Shortfalls

Publication Date: February 2008

Publisher: Center on Budget and Policy Priorities (Washington, D.C.)

Author(s): Elizabeth McNichol; Andrew Nicholas

Research Area: Banking and finance

Keywords: Economic projections; State budgets; Recession; Tax code

Type: Report


If--as is increasingly likely--the state fiscal crisis deepens, state actions are highly likely to cut basic services such as health care and education. Indeed, many such cuts have already been proposed in states facing the largest shortfalls. The depth of the cuts necessary, however, can be reduced if states include revenue increases as a part of their budget balancing packages. The personal income tax, which is a major revenue source for all except nine states, is a particularly promising source of new revenues because it can yield a significant amount of new revenues to help plug the large budget gaps. One way to tap this revenue source is to adopt an income tax surcharge. An income tax surcharge refers to an increase in an existing income tax that is calculated as an add-on to the amount of taxes that would be owed under existing tax law.