New Jersey, still suffering the effects of last year's sweeping business tax increases, took new steps this year that are likely to drive taxes higher.

The Garden State managed to increase taxes this year without raising broad-base taxes as it did last year. But at least one Garden State policy decision may drive employers' costs of job creation significantly higher.

In a last-minute decision, New Jersey lawmakers approved an expansion of unemployment insurance (UI) benefits by $325 million. That hike drained the state's already depleted UI fund, which has dropped in the past two years by more than $1.5 billion, according to the New Jersey Association of Business and Industry.

Further reductions in the UI fund would result in an automatic increase in the payroll taxes paid by employers and employees, the association noted.

Business owners have also expressed dismay at a 55 cent hike in New Jersey's cigarette tax-bringing the total tax per pack to $2.05.

All told, New Jersey's state budget included $600 million in new taxes and fees. But the Garden State also managed to pass its budget without raising major taxes despite facing a budget shortfall of $5 billion--more than 20 percent of the state's total budget.

New Jersey did reduce spending on higher education, the arts, and health care. It also froze aid to local governments.

New York's budget shortfall, in contrast, made up only 10 percent of the state's total spending. To address its fiscal straits, New York's lawmakers enacted no significant reductions in spending. Instead, they raised the state sales tax and the personal income tax on the highest earners by $1.6 billion-so they could restore $1.3 billion in spending that Governor Pataki had warned could cost the state jobs.