State Budget Quandries: Any Heroes Out There?

January 06, 2004

Neal Peirce explores the extreme fiscal challenges states are facing today and what levers are available to help balance the books.

The pedals have hit the metal. The states have performed virtually all the budget patchwork they can -- accounting gimmicks, higher fees, reduced services, trimmed payrolls, tapping tobacco settlement money, resorting to bonds to maintain roads.

Now the mega-choices are all that‚s left.

States can borrow, charging today's spending to tomorrow's taxpayers. Arnold Schwarzenegger, with his $15 billion bond measure, is suddenly the poster child for state borrowing. Other state leaders are clearly tempted, stretching their constitutions toward deficit spending dangerously akin to the seas of red ink currently tolerated by official Washington.

States can try to reinvent. To list, for example, the functions they consider critical, and budget only for those that top their lists. Democratic Gov. Gary Locke balanced Washington State's budget that way last year.

Or states can raise taxes, and reform tax systems. Politically, it's a perilous course. Alabama's Republican Gov. Bob Riley tried with a massive tax reform and education support package, which lost big time in a statewide referendum last September.

Virginia's Democratic Gov. Mark Warner is trying right now, with the most comprehensive tax proposal in play nationally. Warner advocates lower taxes on food and the first $20,000 in peoples‚ incomes, higher taxes for the affluent, a penny sales tax hike for everyone, a big jump in the cigarette tax, and closing loopholes in corporate taxes.

If Warner's package passes, Virginia will have $2.4 billion more to invest in seriously lagging school aid, higher education budgets and transportation. Many businesses are in favor, buying Warner's argument that a high technology, 21st-century economy requires high education levels and quality infrastructure.

But most Virginia Republican leaders, House of Delegates Speaker William Howell in the fore, are dead set against any increased taxation. Boost any tax, goes their warning, and businesses won't want to move into the state.

Will economic recovery produce a surge of revenues, relieving politicians of these tough decisions?

Not any time soon, predict the budget moguls at the Rockefeller Institute of Government in Albany, N.Y. (http://www.rockinst.org/). They believe the severe crunch on state budgets will endure for quite some time to come.

Why? State tax collections fell off precipitously in 2001-2002, much deeper and faster than in past recessions. Reserve funds are depleted. State tax receipts have been slow to recover. Congress isn't letting states tap fast-growing Internet sales. Medicaid obligations are growing rapidly. Many states -- New York, California, Michigan, Kentucky among them -- must still get their big budget deficits under control. Even a recovering stock market isn‚t likely to produce the dramatic gains and income tax yields of the Œ90s dot.com boom.

State fiscal fortunes make a big difference for the entire nation. State and local governments pay more than 90 percent of the bill to educate 48 million children in 93,000 public schools. They provide higher education for 12 million students, run massive law enforcement, corrections and health programs. They're our front line of defense in homeland security.

So inefficient or underfunded state and local governments are a deadly serious issue. If they‚re not up to par, the United States will suffer in this century.

The challenge is to push hard first for efficiencies, possible economies. Warner, in Virginia, has done that by eliminating dozens of marginally necessary boards, agencies and commissions, combining for example scores of technology arms scattered across state government and paring payrolls by 5,000 employees.

But once such economies are in place, the goal must be a tax system fair to all income groups and businesses alike. And one that's robust enough to underwrite quality education, so the people of a state can compete in the modern world economy. Alabama's Gov. Riley grasped those priorities. He tried to correct injustices in Alabama's very regressive tax system. And he focused on improved funding for schools, declaring the old Southern formula of low taxes and low wages a dangerous anachronism.

Even though Riley's big tax reform and school finance package went down in flames, he insists he‚s laid the groundwork for smarter future decisions by Alabamians. (Governing Magazine accorded Riley one of its Public Official of the Year awards "as a reminder that in government, unlike professional football, winning isn‚t the only thing. Character matters as well.")

Indeed, in business some failures are considered routine, before an entrepreneur or partnership hits pay dirt. So why not in politics?

In Virginia, Warner's package has to get past a lower house with 41 members who signed anti-tax pledges in the last election. It will be a tough fight. But isn't it worth fighting?

All too often politicos duck the critical battles. It's easy to to forget that the real game is states that work for their people. Which is why the Rileys and Warners aren't just Don Quixotes. They're true heroes of American politics today.