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States lower taxes for first time in a decade

March 19, 2012: 10:36 AM ET

states lower taxesStates lowered taxes by $2 billion last year -- the first such reduction in 10 years.

But don't be fooled into thinking states were back in the black financially. Despite facing collective shortfalls exceeding $100 billion, strong anti-tax sentiment has led many states to slash tax levies.

Taxes dropped after states allowed several temporary measures to expire, according to the National Conference of State Legislatures.  These hikes had been enacted to boost sagging revenues during the Great Recession.

Sales taxes experienced the biggest drop -- an estimated $5.2 billion -- mainly because temporary increases in California and North Carolina ended.

States also cut corporate taxes by $805 million and miscellaneous levies by $950 million. Twenty states cut corporate taxes last year in a bid to attract more businesses and jobs.

Overall, personal income taxes actually rose by $3 billion, despite the fact that 21 states lowered personal income tax rates. But large increases in just three states -- Connecticut, Illinois and Michigan -- accounted for most of the hike.

Tax cuts were all the rage last year as the anti-tax fervor sweeping the nation also took hold in the states. Republicans gained control of many governor's mansions, and 12 of them signed a pledge not to raise taxes. Even Democratic governors found it tough to hike levies last year.

In 2009, during the depths of the Great Recession, states raised their tax levies by a whopping $29 billion. And they boosted taxes between $3 billion and $4 billion the year before and the year after.

The 2011 tax cuts, however, came at price. States must balance their budgets so in the absence of more revenues, they were forced to enact massive spending cuts to shore up an estimated $106 billion shortfall. Education, health care and social services were hit particularly hard.

Looking ahead, some states are again looking to boost taxes -- particularly on the wealthy -- to put their financial houses in order. Measures are winding their way through Maryland and California, in particular.

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