January 10, 2003


The States See Red

Robert H. Linnell

    States and the District of Columbia are facing their worst budget crises in over 50 years. A growing number of examples prove that the crisis is real and getting worse. What aren’t being discussed are the reasons for the crisis which are (incorrectly) assumed to be simply the economic downturn. States, by law, cannot run deficits and must balance their budgets.The federal government has unlimited power to run red ink, liberally used in fiscal 2002, increasing public debt by a record $421 billion. States now want the feds to bail them out which would further exacerbate federal debt. Is this a sound idea? We can only solve problems if we understand them. First, what is happening.

States and local governments support most of our essential services and infrastructure including education, health care, public safety (primarily police and fire departments), social services, roads and other. In fiscal 2003 the shortfall will be over $50 billion and in 2004 it is estimated to be $60-85 billion, a whopping 13-18% of total state budgets.* The poor will suffer the most. In 11 states that have announced health care cuts, some 1 million people now covered by Medicaid and the State Children’s Health Insurance Program, mostly the working poor, will become uninsured. Elderly and disabled persons, with incomes from 74 -100% of the poverty level ($6,560-8,860), will also lose benefits. As other states develop similar plans the ranks will grow by several million.

Education funding, already under stress from new federal unfunded mandates, will suffer more reductions. Some schools have been reduced to four day weeks. Class sizes will increase, after-school programs are being reduced or eliminated, libraries, computers and supplies will be cut-back;  new construction and renovations are being canceled. Tuition and fees at public supported colleges and universities increased an average of 9.6% last fall (Texas A&M increased 26%); large increases are in the offing for fall 2003. Low and moderate income students are being denied higher education opportunities and all families of college age students are under financial pressure.

How did the states get in such a financial pickle? If caused by the weak economy, everything will be OK as the economy returns to normal. But this is not the case. The real problem is that the states made large, permanent tax cuts in the roaring nineties, based on surpluses caused by unsustainable tax windfalls. These tax cuts reduced state revenues by more than $40 billion per year, over two-thirds of the current and looming shortages. Capital gains

taxes during the stock market bubble increased to 6% of GDP, and at best they will return to half that, the historical level of 3%. Sales taxes, a major source of revenue for states, are decreasing as the economy relies less on taxable goods and more on non-taxed internet sales and services (usually not taxed). Loss of estate taxes will put another hole in revenues; 34 states still couple their estate taxes to those of the federal government, which are being phased out. This benefits only a few thousand extremely wealthy families but will cost states $1 billion in 2003, increasing to $5 billion by 2007. State legislation is required to de-couple state from federal estate taxes.

State tax reductions are strongly linked to their current fiscal crises. The ten states reducing taxes an average of 16.2% during 1994-2001 had a deficit in 2002 of 9.0% of spending and will have an deficit of 13.0% in 2003; the ten states reducing taxes the least, by an average of 0.3%, had a deficit of 4.9% in 2002 and 1.0% in 2003. These permanent tax reductions largely benefited those with higher incomes. The time has come to pay the piper. Those with lower incomes will suffer the greatest loss in services but all suffer in the longer run if corrective action is not taken.

Politicians want us to believe we can have our cake and eat it too, but there is no free lunch. Those taxes that were taken away must be reinstated to restore fiscal sanity to the states. Tax decreases are popular but increases are not. Reinstating based on urgent need is marketable, increases are not. We must let our elected officials know that we want an honest accounting of our fiscal situation and avoidance of the negatives for society that will result from Draconian cuts in essential state functions. It does not solve the problem to have the federal government bail out the states by adding more national debt to the backs of our children and grandchildren.

* We are indebted to the Center on Budget and Policy Priorities, a nonprofit, nonpartisan research and policy institute, supported primarily by foundation grants (www.cbpp.org) for much of our data and analysis.

Reproduced with permission from: www.my-oped.com.”

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