Budget Shortfalls at the State Level Can Have Impacts on Individuals

Many people who live in the Mid-Atlantic region consider moving to lower-cost areas when they retire. BWFA has clients who have done so. These days, with the financial pressures on individual states, it is worth considering both the tax burden and the economic strength of states where people might become residents.

We all know that the states are in deep financial trouble. According to the Center of Budget Policy and Priorities (February 2010), the combined gaps for fiscal years 2010 and 2011 are expected to be $375 billion. The $135 billion to $140 billion in federal assistance offered through the American Recovery and Reinvestment Act may run out before state budget gaps have abated.

Budget woes will linger since most states predict only modest growth for the next several years, and spending demands continue to rise. Medicaid spending leads the way, exceeding budgeted levels in 22 states this year.

 

Maryland’s Outlook

Maryland is in better condition than many other states, but a quick look at its budget shows how challenging the situation can be. The Maryland Budget and Tax Policy Institute (www.marylandpolicy.org) reports that the FY 2011 budget has been passed and is balanced at about $32 billion of expenditures. However, projections FY 2012 through 2015, as required by law, show shortfalls of $1.5 to $1.6 billion annually. To put it another way, only 86% of general fund expenditures are covered by general funds.

 

Maryland is depending on more payments from the federal Recovery and Reinvestment Act to make up the shortfall—or else it will be further cuts in services and/or tax increases. Gov. Martin O’Malley and other policymakers have done a pretty good job, although they’re certainly not finished making cuts.

 

Looking Ahead

As we look ahead, we see tremendous pressures on state and local politicians. On the one hand, they strive to keep their overall tax burden competitive with surrounding states. That’s why they spread the tax burden across personal income, corporate income, sales and use, excise, and real estate taxes. On the other hand, they have to balance their budgets, keep the state’s bond ratings intact, encourage new business development and discourage residents from leaving the state. It will be a tremendously difficult task.

 

Many online sources compare tax burdens in each state, and one of the most comprehensive is produced by the Tax Foundation (taxfoundation.org). The Tax Foundation’s interactive maps allow easy point-and-click comparisons. Also, the Foundation publishes its “Tax Freedom Day” ranking, which represents the number of days in a year that are worked to pay all taxes for that year. We selected states of interest to our clients and ranked their tax burden from greatest to least.

 

Tax Freedom Day by State, 2010
StateDays Spent
Working to
Pay Taxes
Tax
Freedom
Day
Rank
New Jersey115April 252
New York113April 233
Maryland109April 194
DC105April 15N/A
Massachusetts104April 146
California104April 147
Virginia103April 1310
Pennsylvania103April 1311
Delaware100April 1018
Michigan98April 821
North Carolina97April 726
Florida95April 531
Texas95April 532
Maine94April 434
Tennessee91April 144
Alaska85March 2650

 

Deciding where to retire is not an easy decision. Financial issues are only one part of the equation. But it is worth considering the varied tax burdens in different states, particularly for retirements that will last 25 years or more. Quite simply, some states are better-positioned than others to ride out the economic storm and to limit tax increases or service cuts in the future.