Economies up taxes down.

• Author: Mackey, Scott
• Position: States - Includes related article

Strong state fiscal conditions have allowed leaders to make good on tax-cut promises this year.

Most states began 1995 with vigorous economic growth, strong revenue performance, higher reserves and healthy balance sheets. The generally strong fiscal conditions helped state leaders make good on promises to reduce taxes in 1995.

States cut taxes by just under $1.1 billion in FY 1996. When measured by the broader yardstick of the net change in taxpayers' liability, state taxes will fall by $3.1 billion. This is the first net reduction in state taxes since 1985, when states cut taxes by $1.3 billion.

But tax cuts were smaller than many pundits predicted earlier in the year. One factor may be concern about the effects of federal deficit reduction on state budgets. Both Delaware and Ohio set aside additional money in rainy day funds to cover unanticipated federal costs.

Tax cuts were broad-based, with more than a quarter of all the states reducing taxes. Northeastern states were among the most prolific tax cutters: Six of the 11 states in the New England and Middle Atlantic regions cut taxes.

There were several states including Arizona and Pennsylvania that adopted back-to-back tax cuts in 1994 and 1995. New Jersey cut income taxes three years in a row, making good on Governor Christine Whitman's promise to reduce income taxes by up to 30 percent. The net effect of Arizona's back-to-back cuts is a 20 percent income tax cut for all taxpayers with incomes above $20,000 and income tax cuts ranging from 30 percent to 50 percent for residents with incomes below $20,000.

This was the second straight year that personal income tax reductions dominated tax cutting efforts. States cut the personal income tax by almost $1.1 billion ($1.9 billion under the taxpayer liability method). Arizona, Connecticut, Delaware and New Jersey cut personal income tax rates while top marginal rates in California and New York will fall due to earlier legislation.

Even more popular than rate cuts were increases in personal exemptions and standard deductions: Arizona, Delaware, Iowa, Michigan, North Carolina and Ohio cut income taxes using this method. Other personal income tax cuts of note include a $100 tax credit for property taxes in Connecticut; an increase in the pension exclusion for retirees in Iowa and Virginia; and an expansion of the earned income tax credit for low-income workers in New York.

Two states authorized large income tax rebates in 1995. Oregon will...