State Surpluses May Lead To Tax Cuts

The U.S Bureau of Economic Analysis reports that state and local revenues are up 7.2 percent in the first three quarters of 2005. With state personal and corporate tax collections peaking, the question is what to do with their revenue surpluses in 2006. Strong revenue growth has New Mexico realizing a $1 billion surplus, Florida a $3 billion, and even California seeing a $3.4 billion surplus according to USA Today. States taxing energy production and real estate construction have seen windfalls also.

“Every month we’re surprised by the good news and say it has to slow down. But it hasn’t,” Arkansas governor Mike Huckabee told USA Today. Arkansas expects a $200 million revenue surplus in 2005.

Tax cuts will be considered by most states when budgets are presented in January. Income tax rate reductions are not expected but reductions in property taxes, business taxes, and sales taxes on food are being looked at according to USA Today. Tax rebates are also anticipated. 770,000 New Mexico residents are receiving one-time refund checks this week.

Mark Sanford, Republican governor of South Carolina, wants to lower income tax rates but the state legislative leaders are supporting a reduction in property taxes and the sales tax on food instead. Sanford said in USA Today, “Public policy is driven by popular sentiment, and people are angry at the sticker shock from property bills.”

Business taxes are being targeted in Michigan where their Senate has agreed to reduce business taxes by $1 billion over six years. Legislation has spawned several bills including one that would change the main business tax rate from 1.9 percent to 1.84 percent in January according to the Michigan Daily. It is projected that this would save Michigan companies about $50 million over nine months.

You can line up your own tax breaks with deduction planning. You can increase your 2005 mortgage deduction by making January’s payment in December according to Bob D. Scharin, editor of RIA’s Practical Tax Strategies speaking in the Baltimore Sun. Scharin said payment of real estate or estimated state income taxes in December is also a good idea. The only situation against increasing these deductions would be if you are anticipating paying the alternative minimum tax (AMT) rate this year because AMT does not allow the same deductions as the income tax.

Contributions to both disaster-related and non-disaster related charities between August 28 and December 31, 2005 will be 100 percent deductible. Mark Luscombe, a principal with CCH Inc., said in the Baltimore Sun, “If there is someone out there thinking of making a significant gift to a church or another favorite … charity, this would be a great opportunity to do that.”

Contributing to retirement accounts can be beneficial in reducing your tax bill and securing your future according to the Baltimore Sun. Contributions go into your employer’s 401(k) plan on a pre-tax basis and any post-retirement withdrawals will be taxed as regular income. The current annual maximum is $14,000 and those over 50 years of age can contribute an additional $4,000. IRA contributions can be made up until the 2005 tax filing deadline, Monday, April 17th, 2006.

There are other deductions to consider. There are sales tax deductions and deductions for purchasing hybrid vehicles although new energy-saving tax cuts that will not activate until 2006. You will earn a maximum credit of $2,000 for installing a solar water heater or electric system in 2006 and 2007 according to the Baltimore Sun. Energy-saving improvements to your home such as energy-efficient doors and windows or adding insulation may also get you a $500 maximum credit over 2006 and 2007. The list of energy-efficient items has not yet been released by the IRS.


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