Tuesday's victorious gubernatorial candidates may soon be wondering if the voters did them a favor.
Barring some kind of economic miracle, the fiscal outlook for the states is dreary in the extreme. And it's likely to stay that way not just for months, but for years.
The most obvious victims are those most dependent on state aid--the working poor and former welfare recipients classically the "last to hire, first to fire.'' But from universities to road systems to local governments denied basic state aid, there's hurt for virtually everyone.
Even worse, says former federal Budget Director Alice Rivlin, the massive budget cuts the states are making are actually destabilizing the entire national economy, delaying everyone's recovery.
The total fiscal gap for states this year was at least $57 billion. And even before recent news that the economic recovery may be stalling out, the states were looking at greater budget squeezes for next year.
Why?
Already, the states have resorted to the least painful cures they could find--dipping into (and sometimes exhausting) their rainy-day funds, freezing new hires, delving into tobacco settlement money. Many have cut outlays for corrections, schools, colleges, local aid, childcare and Medicaid--even while they and their localities face new homeland security costs.
Many have also gone for bookkeeping tricks that put off the most painful cuts to the next years--when the piper will have to be paid. And when, as the experts say, there's scant chance for a repeat of the soaring consumer demand and booming stock market of the late 1990s, which then triggered fast-rising state sales and income taxes.
Tax hikes during this recession have been rare. Only five states upped broad-based taxes in 2002--New Jersey, Massachusetts, Tennessee, Indiana and Kansas. And 40 percent of those increases were for cigarette taxes.
But with the elections past, many more states will face a moment of truth in which some tax hikes--no matter what candidates promised during the campaign season--will have to be enacted.
Take Wisconsin, which faces a $2.8 billion budget gap. Mark Bugher, a 12-year veteran of former Gov. Tommy Thompson's administration, recently headed a blue-ribbon bipartisan panel trying to figure out what the state can possibly do.
The panel's bottom line: slashing spending alone won't suffice. As Bugher recently told Stateline.org: "It would entail closing departments like corrections. It would entail shutting down major universities. It would be a traumatic evisceration of public services.''
So Wisconsin, like so many other states, will likely raise taxes. And, as Rivlin notes, that takes money out of a struggling economy.
At a Brookings Institution forum last month in Washington, Rivlin offered some ingenious policy fixes to think about.
Right now, she said, the federal government could provide immediate fiscal relief to the states by sending money specifically to cover budget gaps. Alternatively, it could temporarily increase the federal matching formula for Medicaid--the Medicaid bear that's now consuming about 20 percent of state budgets.
Federal relief would ease the mega-cuts many states now face, and surely be anti-recessionary. It makes sense because Washington can borrow to cover its deficits, while the states can't.
For the long run, Rivlin favors a system of "counter-cyclical revenue sharing''--a formula for special federal support for state budgets that's triggered by rising joblessness or other indicators of a seriously weakening economy. The aid would phase out as the economy recovers.
For a federal-state partnership that really works, I've rarely heard a better idea.
But states can do much to help themselves, Rivlin adds. They should accumulate more reserves in good years. And they could get together (with appropriate federal legislation) to adopt some common taxes to share.
Example: A common tax of large corporations that operate across state lines and have now, with their smart accountants, found ways to game the complex variations in state laws and avoid vast amounts of state tax liability. The yield could be returned to the states, possibly through a population-based formula.
An even more revolutionary idea from Rivlin: Enact a common, shared nationwide sales tax for return to the states. That way, catalogue and Internet sales could be taxed just as effectively as sales by local stores. And there would be less competition to get customers to cross borders in multistate metro areas, just to pay a lower sales tax.
Already, there's an effort among the states called the "Streamlined Sales Tax Project,'' an attempt to get standard sales tax definitions so the courts will more likely allow states to tax sales from out-of-state vendors.
But Rivlin's ideas really ought to be debated. We need ways to relieve the negative effects of state budget cuts and tax hikes in recessions. More broadly, we need to get about building a rational fiscal federalism that's worthy of a great nation.
Neal Peirce's e-mail address is nrp@citistates.com.
(c) 2002, The Washington Post Writers Group
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