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Many governors forced to look at tax hikes they never imagined

Posted: Thursday, December 26, 2002

LITTLE ROCK, Ark. (AP) -- Republican Gov. Mike Huckabee shocked legislators recently with a proposal to raise the general state sales tax by five-eighths of a cent.

He called a tax increase ''an anathema,'' but said that with recent court rulings and federal mandates to provide certain services, he had no option.

In December, New York Republican Gov. George Pataki warned that he couldn't rule out layoffs, tax increases or postponing already approved tax cuts to meet the state's multibillion-dollar deficit. This from a governor who, in 1994, defeated Democratic Gov. Mario Cuomo with a promise to cut taxes and turn the economy around.

Governors across the nation who never thought they would find themselves advocating tax increases are now facing budget holes that they say leave them with little choice.

''We have state after state underperforming on the revenue side of the ledger such that there is growing concern and evidence that shortfalls will be plentiful in the upcoming year,'' said Arturo Perez, a senior fiscal analyst at the National Conference of State Legislatures.

Critics say there's always an alternative to raising taxes.

Pete Sepp, a spokesman for the National Taxpayers Union in Alexandria, Va., a nonpartisan anti-tax group, said governors should look at cutting services.

''Governors do have a choice when it comes to closing budget gaps. Resorting to tax hikes as opposed to spending restraint may actually deepen the hole they have already dug for themselves,'' he said.

Alaska Gov. Frank Murkowski, who was elected in November on a ''no new tax'' pledge, has vowed to turn around the state's declining oil production to close a budget gap expected to reach $1 billion by 2004. In the meantime, Alaska has a $2.1 billion budget reserve from which to draw to close chronic shortfalls.

But Steve Cochrane, a senior economist for Economy.com, an economic analysis service, said other states sometimes have little choice.

''The most important thing is to get that budget in balance as quickly as possible,'' he said. ''If a state is up against a wall and cut to bare bones and the budget still looks bad, raising taxes may be a painful but necessary act.''

He said states could raise taxes temporarily and hope revenues will improve by the time the tax expires.

In Arkansas, where recent court rulings point the way to more spending on education and Medicaid, a legislative panel has rejected Huckabee's tax increase proposed in November. It prefers no increase in spending over the next two fiscal years, which would require a cut in the governor's budget request. Huckabee says legislators are making a mistake.

''Our state agencies have cut and cut and cut. They cannot make additional cuts without affecting essential services,'' Huckabee responded.

In Connecticut, Republican Gov. John G. Rowland is supporting a Democratic plan to raise the tax rate on people who earn more than $1 million per year from 4.5 percent to 5.5 percent. The tax would raise about $164 million in one of the country's wealthiest states.

Rowland vetoed the tax this summer, but reversed himself this month with the state facing a $500 million deficit this fiscal year and a $1.5 billion gap in the next budget.

''This is not an action that I want to take,'' Rowland said. ''But as governor, I must do what is best for the state and all of its citizens.''

In July, when most state fiscal years begin, states had taken measures including laying off workers and spending reserves to erase most of a cumulative gap between revenues and budgeted spending of about $49 billion, an NCSL report said. Since then, 31 states face budget gaps totaling at least another $17.5 billion.

''The options are much more limited this coming session. Several states drained out their rainy day funds,'' Perez said. ''(Now) that action is not available to those states. Coast to coast, the hope was the actions would only be necessary in 2002, and if the economy recovered, revenues that support state spending would also recover. We are not there yet.''

Arkansas has the option of tapping money from a settlement with tobacco companies over health care costs, but many other states don't have that chance.

Cochrane said many states, including California, dipped into their tobacco-settlement funds to plug holes, and can't do so again.

In Washington state, Democratic Gov. Gary Locke has proposed suspending three popular citizen initiatives rather than seek a tax increase to pay for the spending they mandated.

When recession hit in 1993, Locke, then House Appropriations chairman, and the Democratic-controlled Legislature passed a billion-dollar package of tax and fee increases. Today, as governor, he is taking a no-new-tax approach to closing a $2.4 billion budget gap.

He has proposed suspending an initiative that would improve health care for the poor and two that would create smaller classes and increase teacher pay, plus ordering layoffs and eliminating social programs.

''These are all good programs, but we just can't do it all,'' Locke said. ''It's better that we do the most important things than trying to do so many things.''

In California, lawmakers have not been shy to raise taxes, but the state still faces the nation's largest deficit.

Democratic Gov. Gray Davis said he will likely propose tax increases when he presents his budget Jan. 1, but has not elaborated.

In 2001, Davis' narrowly approved budget included a quarter-cent sales tax increase, and Republicans said it lacked sufficient cuts.

Early last year, Davis said he would balance the state budget without tax increases, but he changed his tune when the budget deficit soared to $23.6 billion. The state's 2002-03 budget, signed in September, was about $100 billion.

Lawmakers filled in the budget hole with borrowing, cuts and fancy accounting, but the state now faces a $35 billion deficit over the next 18 months.

Cochrane said that while the economic picture isn't getting any worse and some revenue growth is expected, it doesn't look to improve dramatically anytime soon.

''If the governors or legislatures are expecting a leap, they're dreaming,'' he said.



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