Legislatures struggle to square spending, taxes

Posted: Sunday, June 29, 2003

ATLANTA Summer started early this year in Oregon, when cash-strapped schools there shut down weeks ahead of schedule. Prisoners in Kentucky got get-out-of-jail-free cards. The wait for subsidized child care in Alabama, already two to three years, grew even longer. And in Michigan, the governor wasn't just content with asking state employees to forego raises. She pushed to cut their pay.

"The reaction was 99.9 percent, 'You've got to be kidding!''' said James Walkowicz, a state welfare-agency worker in Detroit.

Welcome to the world of state finances, which are caught up in their most serious crisis in decades.

As 46 of the 50 states, including Alaska, prepare to enter a new fiscal year Tuesday, elected officials are scrambling to cope with both the growing costs of government, particularly for education and human services, and severely declining tax revenues.

It's what Arturo Perez, a fiscal analyst with the National Conference of State Legislatures, calls "a perfect mixture'' that makes balancing the budget, as states must do by law, a nightmare.

A survey earlier this year by the Washington-based Center on Budget and Policy Priorities found that states collectively are facing 2004 budget gaps of $71 billion to $82 billion. Those shortfalls represent 14.5 percent to 18 percent of all state expenditures. Even a $20 billion federal bailout folded into the tax cut passed by Congress in May will merely dent the deficits.

Easy fixes tried first

At first, states reacted to the growing red ink with the easiest fixes they could find. They plugged budget shortfalls with "rainy-day'' reserves, nonrecurring revenues, accelerated tax collections and money from the national tobacco settlement. But as the recession drags on, states are being forced to make deep across-the-board spending cuts, affecting vital services from health care to education to law enforcement.

"These are real cuts that go beyond trimming the fat,'' said Liz McNichol, senior fellow for the Center on Budget and Policy Priori-ties.

State employees tend to be one of the first groups affected by fiscal austerity. Governors seeking to avoid layoffs are trying to save money by leaving vacancies unfilled, increasing the workload for remaining state employees, and cutting back raises.

But Michigan Gov. Jennifer Granholm, a Democrat, took it a step further when she asked unionized state workers to accept a pay cut. The unions balked at the proposal, which would have reduced wages by an average of $4,100 per employee.

I'm single, so I can't say that would have put me in the poorhouse,'' said Walkowicz, one of 17,000 state employees represented by United Auto Workers Local 6000. "(But) most of the people who work here are single parents. Even a dollar drop is a big change for these people.''

Cuts hurt families

When state agencies reduce their staffs because of cuts, it hurts those who benefit from state services.

Alabama families are waiting longer for subsidized child care because state budget cuts are making it harder for day-care centers to stay in business, said Elizabeth Sankey, who owns and runs two day-care centers in Montgomery.

The state has imposed stricter quality standards on child-care workers in recent years, including continuing-education requirements. Yet, funding cutbacks have reduced the number of classes.

"It's making it very difficult for day-care workers to get the training we need to get our license renewed,'' Sankey said.

In some cases, states find they've gone too far in their budget-cutting zeal.

Last winter, Kentucky Gov. Paul Patton, a Democrat, ordered the early release of almost 900 low-level felons from the state's cash-strapped prison system. At least four were later arrested and charged with violent crimes, including rape and kidnapping, prompting a public outcry.

"The last thing anyone should be doing is releasing prisoners before they complete their sentences,'' said Brian Wright, spokesperson for Kentucky's Democratic attorney general, Ben Chandler, who sued the governor to get the releases stopped.

In the end, Patton backed off and ended the releases.

Revenues decline

While spending increases during the 1990s played a role in states' current fiscal woes, the key factor is declining revenues. Tax collections fell in 40 states between fiscal years 2001 and 2002, according to a survey released by the National Conference of State Legislatures in April.

"For many states, it was the first time they saw a downturn in collections year to year,'' said Perez.

Economists blame the stock-market bust for the severity of the decline.

With an unprecedented percentage of the population holding stocks and bonds thanks in large part to the proliferation of employer-based investment plans the sudden tanking of the market sent consumer confidence into a tailspin. The resulting downsizings and layoffs as business slowed sent incomes plummeting.

That, in turn, affected income taxes, particularly in states with progressive tax systems that rely on upper-income taxpayers. High-income earners in states like California and several Northeast-ern states, heavily invested in the stock market, saw their incomes fall off the table when the economic boom of the late 1990s yielded to leaner times.

"The big capital-gains run-up in the later '90s created a lot of exposure for states,'' said Nicholas Jenny, senior policy analyst with the Rockefeller Institute of Government at the State University of New York at Albany. "When it went away, it took a huge bite out of state revenues.''

But states that depend extensively on sales taxes for their revenues also were hit by the recession. When the economy soured, consumers delayed big-ticket purchases. The resulting decline in sales taxes from merchants hurt states like Florida, Texas and Tennessee, which have no income tax.

"This was an equal-opportunity recession,'' said Perez. "It affected states across the country.''

Tax hikes weighed

With declining revenues driving the states' budget crunch, governors and legislatures increasingly are looking to tax their way out of the mess.

McNichol said that by last spring, 20 states had enacted some form of tax increase and 11 others had tax-hike proposals on the table. Most of those increases were in alcohol and tobacco taxes, the least painful for governors and state legislators because they're the easiest to sell politically. Even many smokers aren't fazed by higher tobacco prices.

"What the government knows is that people's addiction prevents them from quitting, even if the price goes as high as they want to raise it,'' said Eric Mason, a cigar-smoking legal worker in Atlanta, where a state tax hike will raise the price of cigars by 10 percent come Tuesday.

Elected officials, however, are more reluctant to raise income or sales taxes than their predecessors were during the last recession a decade ago.

Anti-tax advocates are a more potent force in politics today, said Pete Sepp, spokesperson for the National Taxpayers Union. He said his group and others use the latest computer technology to put pressure on politicians weighing the consequences of raising taxes.

"We now have the capacity to inform people of breaking developments in their state legislatures a lot quicker than we could even five years ago,'' Sepp said. "We can generate a firestorm in two to three hours instead of two to three days.''

Jenny said state politicians also watched as a parade of tax-raising governors were defeated in 1990s elections. They included Mario Cuomo of New York, California's Pete Wilson and Jim Florio of New Jersey.

"Politicians notice these things,'' Jenny said.

Tax votes

Still, some states are in a deep enough hole that their political leaders have tried to raise even the more unpopular taxes.

Parents in Oregon organized a grass-roots group to push for passage of an income-tax increase. They warned of drastic reductions in state funding to law enforcement and education if the measure failed, including a significant shortening of the school calendar in some districts.

But the state's voters defeated the proposal last January by a margin of 55 percent to 45 percent.

"A lot of people thought the cuts were bluffs,'' said Chuck Sheke-toff, executive director of the Ore-gon Center for Public Policy. "They're starting to see cops aren't coming to arrest people for low-level crimes, and prisoners are getting let out early.''

Portland schools knocked 24 days off the school calendar last spring, one factor that helped convince Multnomah County voters to pass a local tax referendum in May.

Money was so tight in Alabama last fall that the state stopped jury trials for a couple of weeks until emergency funds could be freed up.

At the urging of Republican Gov. Bob Riley, Alabama lawmakers passed an ambitious tax-reform package earlier this month. It would increase taxes by $1.2 billion, mostly by putting more of the burden on middle- and upper-income families.

Encouraging poll

Supporters are optimistic that voters in one of the most anti-tax states in America will ratify the tax hike in September.

Mary Weidler, policy analyst for Alabama Arise, an advocacy group for services to the poor, pointed to a recent poll that found opposition to the proposal at 51 percent.

"It shouldn't take that much to turn that around,'' she said. "The governor has promised to go out and try to sell this package.''

Whether voters in Alabama and other states can be convinced to go for higher taxes, state bean counters are relieved that the federal government has noticed their plight.

The $350 billion tax cut Presi-dent Bush pushed through Con-gress last spring includes $20 billion in additional federal aid to states. About half of the money is earmarked for Medicaid, the joint state-federal health-care program for the poor, while the rest is in the form of flexible grants.

Still, analysts say the bailout is a Band-Aid at best, considering the magnitude of the state shortfalls.

"I hope it's going to help with some of the Medicaid shortfall,'' said McNichol. "(But) $20 billion can only go so far.''

Brian Basinger of Morris News Service contributed to this report.

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