How to deal with out of control government spending is a problem that has plagued the U.S. at all levels of government in recent years and could play a large role in the outcome of November's Presidential election.
In Washington, the fight between Republicans and Democrats over how to solve the issue makes headlines daily. Conservatives want to roll back government spending and keep taxes low. Liberals would prefer to keep taxes low on middle class families and raise them for the wealthiest Americans, as well as increase spending to keep the economy from falling off a cliff.
Speaking of cliffs, the so-called "fiscal cliff" lurks at the end of the year. If Congress does not get its act together, taxes could jump for all Americans come January. At the same time, $1.5 trillion in across the board budget cuts will take effect.
While Republicans and Democrats in Congress fight over how to deal with higher and higher budgets and deficits, the fiscal health of state and local governments is slowly and quietly improving due in large part to higher taxes across the board.
"The reason that states and cities are doing this is because they have to balance their budgets," says Rick Newman, chief business correspondent for U.S. News and World Report, who recently wrote an article detailing this slow changing tide towards higher taxes on the state level. "They don't have the option to borrow and put it off as the federal government does."
In the accompanying interview, Newman says taxes have already gone up in roughly 35 states in a combination of a lot of small taxes and fees.
In his article Newman writes:
A new analysis by the nonprofit Tax Foundation shows that 13 states and the District of Columbia raised sales tax rates between 2007 and 2011, largely to rake in more revenue as the recession cut into state budgets. In Arizona, California, Indiana, Iowa, Kansas, Maryland, Massachusetts, and Utah, sales taxes rose by a full percentage point or more, though in a few of those states, the increase is supposed to be temporary.
That's on top of a lot of other new revenue that states and cities have been collecting from taxpayers. Between 2008 and 2010, 36 states raised taxes or fees, according to the National Association of State Budget Officers. One of the biggest hikes was an increase in Illinois's income tax rate from 3 percent to 5 percent. In many other cases, there have been hikes in targeted taxes on things like cigarettes, alcohol, hotel rooms, and rental cars, or higher fees for car registrations, hunting licenses, and many other things administered by the government.
No one likes higher taxes, especially during difficult economic conditions, and this was evident in Wisconsin after Republican Governor Scott Walker won his recent recall election, notes Newman.
"Voters would rather have smaller government even if that means fewer teachers, cops and firefighters," he says. "But I don't really think that was a vote against the union as much as it was a vote that said we just don't want you to raise our taxes to come up with this money to pay the unions"
While paying more to the tax man is frustrating, it's clearly helping state and local governments rein in budget shortfalls.
According to a recent report by the National Council of State Legislatures, revenue performance (i.e. tax increases) remains positive and expenditures are stable in most states. In the first eight months of fiscal 2012, very few states faced mid-year budget shortfalls and fewer budget gaps are forecast for next year.
Newman, also the author of Rebounders: How Winners Pivot from Setback to Success, believes the shift to fiscal conservativeness in the states is a preview of what's to come on the national level.
"People who want to see smaller government are going to get their way," he says. "We are seeing it happen already. It is just happening at the state and city level."
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