WASHINGTON, Feb. 3 (UPI) -- Revenue shortfalls facing many states are rooted in inadequate and unfair tax systems, according to a new Governing magazine study reported Monday.
"The vast majority of state tax systems are inadequate for the task of running a 21st-century government," it states. "They break the golden rule of tax equity: collect the lowest possible rates on the widest possible base of taxpayers."
"The Way We Tax: A 50-State Report" was compiled over a year by Governing staffers and sponsored by the Pew Center on the States. It grades each state on adequacy of revenue, fairness to taxpayers and management of the tax collection process.
Although states were not ranked, the study finds 11 states -- including California, Florida and Texas -- need a complete tax overhaul. With the exception of Delaware, New Mexico, North Dakota and Wyoming, the other states require substantive changes.
At a time when their treasuries are starved for cash, the researchers found many states have also cut back funding for their tax collection agencies, one of the few agencies that can actually bring in more dollars than it spends.
State governments are facing their worst budget crisis since World War II. Aggregate state deficits for fiscal 2004 could reach $60 billion to $85 billion, according to a report in December by the Center on Budget and Policy Priorities.
The new report comes as governors and state legislatures are weighing tax hikes or spending cuts to balance their budgets, a requirement of most state constitutions. Each state faces its own set of issues.
Katherine Barrett, a co-editor of the project, said the team found no one formula that fits all.
"States' needs and wants differ and so should their methods of raising revenues," she said. "But it's hard to deny that they have to bring in enough money to make ends meet."
Although most states will first look at cutting expenses in meeting revenue shortfalls, the report states they might also have to take a hard look at their tax systems.
"Truth is, many states' current maladies are rooted in long-diseased tax systems," the report states. "And although some state leaders are still living in denial, today's problems were nothing if not predictable."
Sales, personal income, property and corporate taxes are the primary sources of revenue for the states. A balance among the four is ideal, the study states.
"A diversified revenue structure is important," says Don Boyd, director of the fiscal studies program at Nelson A. Rockefeller Institute of Government, because it brings stability and a more constant revenue stream.
Boyd pointed to Alaska as an example of what happens when there is no balance.
"You see that their revenues swing wildly because they rely on one or two revenue sources," he notes.
Tax reform is being discussed more in states, the report says. Nevada, South Carolina, Washington and other states have studies under way. Changes require shifting burdens, however, and selling the voters on their fairness.
Despite the dire predictions of what an income tax would bring to Connecticut in 1991, the researchers found that it brought a more balanced tax system to the state. Florida, Tennessee and Texas, all states without a state income tax, are facing serious budget problems but their leaders are opposed to the tax.
Others argue that spending cuts are an alternative to tax reform, but the question then becomes whether there is enough fat to balance the budget and how much cutting citizens will accept before they revolt.
