SINCE launching beverage maker Fizzy Lizzy in 2000, company founder Liz Morrill has been pitching her juice-infused seltzer water drinks as a low-calorie alternative to soda. But if New York Gov. David Paterson gets his way it won’t matter if her products are the healthier option or not — he wants to levy the same higher tax on both varieties.
Paterson is searching for ways to close the state’s current $15.4 billion budget gap, brought on by the recent downturn in the economy. One idea he has is to tack on an 18% surcharge to the price of nondiet sodas and fruit drinks that contain less than 70% juice. (Fizzy Lizzy drinks have between 45% and 70% juice.) Besides raising cash for his state’s coffers, Paterson has an altruistic explanation for this plan: It could help curb childhood obesity and promote a healthier New York.
Either reason doesn’t sit well with Morrill. If the 18% increase is passed it would be added to an already existing 8% charge. That means a bottle of Fizzy Lizzy could increase to $1.99 from $1.69. “This will depress our sales significantly,” she says. She also takes issue with the health aspects of such an “arbitrary” and “unfair” tax. “The more juice a drink contains the more calories it has,” she says.
Beverage company CEOs aren’t the only small-business people who could soon be confronting similar obstacles. The Center on Budget and Policy Priorities estimates the combined budget gaps states face over the next three years tops $350 billion. That means local governments across the country could resort to a raft of new tax policies to make up the shortfall. “States haven’t seen these kinds of deficits since World War II,” says Elizabeth McNichol, a senior fellow specializing in state fiscal issues for the CBPP.
Here is just a sampling of the new tax proposals being bandied about in state houses across the U.S that could potentially impact small businesses.
State Unemployment Compensation Tax. As the nation’s workers increasingly join the ranks of the unemployed, the pools of money from which states pay out their jobless benefits are dwindling. To stave off bankrupting its fund, Maryland recently doubled its minimum unemployment insurance tax paid by employers to 0.6% from 0.3% on the first $8,500 earned by employees while on a payroll. Robert Cline, director of Ernst & Young’s state and local tax policy economics division in Washington, D.C., notes further that the maximum unemployment insurance tax rate that companies pay per employee in the state increased about 20% to 9%.
Corporate Income Tax. Maryland also raised its corporate income tax rate to 8.25% from 7% in 2008.
Annual Corporation Fees. Oregon Gov. Ted Kulongoski proposed increasing his state’s annual $10 minimum incorporation tax, which hasn’t been raised since 1931. The minimum franchise tax due on a firm incorporated in Delaware rose from $35 to $75 in 2008. Also in Delaware, the tax for limited partnerships, limited liability companies and general partnerships increased to $250 from $200.
Sales-Tax on Services. A number of states including New York, Washington and California, are proposing broadening the reach of sales taxes to include services such as haircuts, auto repair, legal and accounting services, memberships and sporting events.
Sales-Tax. California Gov. Arnold Schwarzenegger is proposing a 30% increase in the sales tax rate over the next three years to 6.5% from 5%. Maryland also moved to boost its rate to 6% from 5%. New York State would eliminate its former sales-tax exemption on clothing and footwear under $110. (The New York State sales-tax rate of 4.375% was repealed in 2006.)
Gross Receipts Tax. Beginning in 2009, Delaware raised its gross receipts tax by about 25% on most forms of business activities performed in the state. A gross receipts tax, which is based on a business’s gross revenues, is similar to a sales tax, but instead this tax gets levied on sellers of goods and services. (Note that Delaware does not impose a state or local sales tax.) Illinois policy makers are considering a 1% gross receipts tax, which would benefit the state’s public schools.
Luxury Tax. New York Gov. Paterson would add a 5% luxury tax on high-priced cars, yachts and jewelry.
Online Tax. New York rewrote its law on Internet sales tax to force large online retailers to collect up to 8.75% of the price on anything shipped to New York. The measure is expected to raise $50 million for the state. Paterson also proposes a 4% sales tax on digital content such as music downloads from Apple’s ( AAPL ) iTunes.
Cigarette Tax. Small convenience store owners may soon see higher prices per pack from Massachusetts all the way to Virginia. In Virginia, Gov. Tim Kaine proposes doubling to 60 cents the existing per-pack tax, or the equivalent of $6 per carton. Kentucky Gov. Steve Bashear would raise the tax even higher to $1 from 30 cents.
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( “Starting Up,” a weekly column written by Diana Ransom for smSmallBiz.com, follows entrepreneurs through the early stages of launching a business. Write to her at email@example.com .)