Originally created 06/30/03

Declining revenues tax state leaders



ATLANTA - Summer started early this year in Oregon, when cash-strapped schools 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 long, grew longer.

And in Michigan, the governor wasn't content with asking state employees to forgo 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 Georgia and South Carolina, prepare to enter a new fiscal year Tuesday, elected officials are scrambling to cope with the growing costs of government, particularly for education and human services, and severely declining tax revenue.

Arturo Perez, a fiscal analyst for the National Conference of State Legislatures, says it 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, a nonpartisan organization that conducts research on government policies and programs with an emphasis on those affecting low- and moderate-income people, 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 will merely dent the deficits.

No easy out 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.

As the recession drags on, however, states are being forced to make deep across-the-board spending cuts, affecting such vital services as health care, education and law enforcement.

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

Falling revenue Though 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," Mr. Perez said.

Governors and legislatures increasingly are looking to tax their way out of the mess. Ms. McNichol said that by spring, 20 states had enacted some form of tax increase and 11 others had 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 increase on tobacco will raise the price of cigars by 10 percent 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 groups are a more potent force in politics today, said Pete Sepp, a spokesman for the National Taxpayers Union. He said his group and others use the latest computer technology to put pressure on politicians weighing tax increases.

"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," Mr. Sepp said.

"We can generate a firestorm in two to three hours instead of two to three days."

Nicholas Jenny, the senior policy analyst at the Rockefeller Institute of Government at the State University of New York at Albany, 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," he said.

Tax votes Still, some states are in a deep enough hole that their political leaders have tried to raise even the less popular taxes.

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

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

"A lot of people thought the cuts were bluffs," said Chuck Sheketoff, the executive director of the Oregon 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."

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 early this month.

It would increase taxes by $1.2 billion, mostly by putting more of the burden on middle- and upper-income families.

Supporters are optimistic that voters will ratify the tax increase in September.

Mary Weidler, a policy analyst for Alabama Arise, an advocacy group for 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."

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

The $350 billion tax cut bill President Bush pushed through Congress in the 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 temporary fix at best, considering the magnitude of the state shortfalls.

"I hope it's going to help with some of the Medicaid shortfall," Ms. McNichol said. "Twenty billion dollars can only go so far."

BUDGET DEFICITS

Here are the estimated state budget deficits in the Southeast for fiscal year 2004:

State/Amount/Percent of budget*

Alabama/$500 million/9.3

Florida/$2.0 billion/10.1

Georgia/$900 million/5.8

North Carolina/$2.0 billion/14.6

South Carolina/$700 million/13.6

Tennessee/$500 million/6.6

*reflects FY 2002 budgets, the latest final budgets available

Source: Center on Budget and Policy Priorities

Brian Basinger of Morris News Service contributed to this report.