An improved economy has helped restore most states’ finances to their best levels since 2001, with net tax cuts of $850 million in 2005. According to the annual fiscal survey of the states by the Rockefeller Institute of Government, state governments are looking at a rosier picture for the new year.

Eleven states made significant changes to their tax levels last year, with seven states actually reducing taxes. The largest state tax cuts were attributed to the State of Ohio with over $1 billion in reductions, mostly related to the personal income tax and sales taxes. New York had about $600 million in tax cuts. However, the state with the highest percentage cut in its taxes was little Idaho, which rolled back its sales tax.

On the other hand, six states did resort to tax increases. Most of those tax hikes were associated with the sale of tobacco products. Cigarette taxes have become one of the “likely targets” when legislators look for opportunities to raise revenues due to the unpopularity of smoking among the majority of taxpayers.

The Institute’s report is optimistic about state financial prospects for 2006 and the possibility of additional tax cuts. The 2005 Tax and Budget Review can be found on the Rockefeller Institute’s web site.