Deficits Follow Years of Heady Growth : Most States in Northeast Paying Price of Prosperity

On Lexington Avenue in mid-Manhattan, hundreds of students sat blocking traffic one day early this month while others occupied buildings on 15 campuses throughout the state in 1960s-style protests against proposed tuition increases.

In Elizabeth, N.J., the mayor’s house was pelted with eggs and his car stolen last month after he laid off 225 city employees, over half of whom were police and firefighters. Unless cuts in state aid are restored, Mayor Thomas G. Dunn expects more layoffs at the end of this month and said he may have to consider declaring the city bankrupt.

Gov. Michael S. Dukakis appears to need nothing short of a Massachusetts miracle to salvage his popularity, which is at an all-time low as he squabbles with his Legislature over how to close a gaping deficit.

Through six years of intoxicating double-digit economic growth that was the envy of the rest of the nation, governors and legislators of the Northeast lived it up. They spent lavishly on all sorts of necessities they had long neglected, as well as ambitious new programs. And they still had enough money left over to slash taxes.

“We had the horn of plenty here,” said Rep. Jack Flood, chairman of the Massachusetts House Taxation Committee.

Now, the party is over, and the region’s politicians are waking up with a mighty fiscal hangover. Tax receipts are down sharply, but voters are still demanding all the services they came to enjoy over the last few years.

With extra money around, “you establish programs that develop constituencies who see these programs as absolutely essential,” said Rep. Donna P. Sytek, chairwoman of the New Hampshire House Ways and Means Committee.

Those are usually the first to be trimmed. “It’s been terrible,” Sytek said. “We had hundreds of people--thousands--turn up at budget hearings. People came out in numbers I had never seen before.”

Not all the states in the region are feeling the pinch. Maine and Vermont still seem to be in relatively good shape.

The other states, in some sense, are victims of their own successes. Although most are close to full employment, they have continued to base their plans on projections that growth would continue at the rapid pace of the last few years.

Potential ‘Almost Nil’

“When your state economies have been as robust as these have been, your potential for growth is almost nil,” said Marcia A. Howard, research director of the National Assn. of State Budget Officers.

Also, many are blaming the unexpected effects of the 1986 changes in federal tax law. Among other things, the loopholes it closed were expected to increase corporate tax receipts. But revenues from business taxes dropped instead, and the Northeastern states, more dependent on business taxes than any other region, felt the loss the worst.

Critics, however, see another reason for the sudden turnaround: They accuse their leaders of mismanagement, bad planning and outright deception.

The bitterness runs so deep that in several states, governors who once enjoyed enormous popularity are drawing sharp fire from their own political party.

Flood has accused fellow Democrat Dukakis of “lying,” “stonewalling” and “conning” the people of Massachusetts.

Touted Recovery in Campaign

Dukakis made his state’s economic recovery--the “Massachusetts miracle”--a focal point of his unsuccessful presidential campaign. He had locked up the Democratic nomination before it became clear that Massachusetts was staring at a deficit.

With each passing month, the news in Massachusetts gets worse. April’s tax collections were supposed to be up by 13.1%, but they fell 1% instead, giving the state a $250-million projected shortfall for the fiscal year ending June 30.

As Dukakis tries to push more than $600 million in new taxes through the Legislature, the lame-duck governor’s credibility is plummeting in the face of accusations that he distorted the state’s fiscal picture last year to further his presidential ambitions.

“People are very, very angry that he didn’t tell us the truth about the fiscal crisis,” said Barbara Anderson, leader of the watchdog group Citizens for Limited Taxation.

New Picture Emerges

On the campaign trail for George Bush last year, New Hampshire Gov. John H. Sununu lost few opportunities to point out the weak spots in the Massachusetts economy, and when he left office last January to become White House chief of staff, Sununu boasted in his farewell address that he had built a $10-million surplus. But only five hours later, when incoming Gov. Judd Gregg gave his inaugural address, the real picture became clear: That comfortable cushion had disappeared months before, and what the state was actually facing was a $13-million deficit.

Only a year ago, New Jersey was taking in $600 million more than it was spending. Under Republican Gov. Thomas H. Kean, the state more than doubled spending on education, substantially increased Medicaid, began an expensive new welfare reform program, created a $40-million campaign against AIDS, while phasing out inheritance taxes and cutting a variety of business taxes.

Now, even though Kean has proposed the smallest spending increase in two decades, the state faces a $498-million shortfall in its $12.1-billion proposed budget for next year. Kean is in a pitched election-year battle with his own party’s lawmakers over a $350-million tax plan that he describes as reform and that they see as an increase.

Many of the additional revenues would go to troubled cities such as Elizabeth, which requested $33 million in state aid and got only $7 million.

“They’ve made me the scapegoat of this thing,” Mayor Dunn said in an interview. He has bugged his own phone amid a stream of anonymous threats. One night, hundreds of shouting protesters, about half of them police and firefighters, gathered on his lawn shortly before midnight.

“The night I was held hostage in my home was the scariest night that I’ve had since World War II,” Dunn said.

Connecticut, which got three big tax cuts during the boom years, is also engaged in a heated battle over raising them again. Last January, it suddenly learned that it was running a $247-million deficit, and even after it passed a variety of new taxes in March to plug the hole, next year’s deficit is projected at $700 million.

New York legislators reached agreement on a $47-billion budget last month, struggling three weeks after their legal deadline to close a projected budget deficit of almost $3 billion.

The new budget includes an additional $1 billion in higher fees and taxes, and will mean laying off state employees. The necessities of life--from birth certificates to death certificates--will cost more.

Initially, the budget also anticipated raising tuition at state universities by $200 a year, to $1,550. The move sparked 11 days of student protests that ended only after Gov. Mario M. Cuomo vetoed the tuition increases. But his veto still leaves university officials with the problem of how to come up with $45 million.