States May Have to Raise Taxes to Avoid Fiscal Turmoil, Study Says

Squeezed by declining revenue and rising health and welfare costs, the nation’s governors will have to impose more budget cuts over the next few years and may have to continue raising taxes, two public interest groups said Wednesday in a joint report on states’ fiscal conditions.

“Despite three consecutive years of cutting spending and raising taxes, states are still in fiscal turmoil,” said the Fiscal Survey of the States report, co-authored by the National Governors’ Assn. and the National Assn. of State Budget Officers.

The annual report said that state budgets, reflecting lower revenues, rose by an average 5.1% in the 1992 fiscal year, well below the 8% average growth rate of the 1980s. In the current fiscal year, the average growth is expected to slow to 2.4%. For most states, the 1993 fiscal year began in July.

In addition to spiraling social spending, the report cited a host of other problems that will hamper the ability of states to meet their fiscal responsibilities throughout the 1990s.

Overall state revenues will lag behind an already sluggish economic growth rate because intensifying overseas competition is curtailing corporate profits, a major source of state tax revenue. Few states have taxes on the service sector, one of the few areas experiencing robust economic growth.

Compounding the problem is a lengthening list of spending needs for prisons, education, transportation, environmental programs and increasing state matching requirements for various federal grants.

To handle the explosion of costs, states raised taxes and fees by $15 billion in fiscal 1992 and a much more modest $3 billion for fiscal 1993. Raymond Scheppach, executive director of the National Governors’ Assn., said that sluggish economic growth is plaguing state budgetary efforts more than was forecast in a preliminary survey in April.

But “tax increases in the short-run are unlikely unless the economy deteriorates further,” he said, adding that more attention is being focused on spending cuts and program reform.

Thirty-five states were forced because of lower-than-expected revenues to make midyear reductions in their fiscal 1992 budgets by a total of $4.5 billion. A year earlier, 29 states had to reduce their budgets.

Reeling from double-digit growth in Medicaid costs, 17 states cut Medicaid allocations in their fiscal 1993 budgets, the report said. Medicaid accounts for 15% of the 1993 state budgets and is projected to rise to 28% by 1995.

Scheppach also expressed hope that reform efforts targeting Medicaid and welfare programs would cut costs.

Susan Steinmetz, senior policy analyst at the Center on Budget and Policy Priorities, said that once again the poor “have had to bear a disproportionate amount of the budget cuts.”

National Governors’ Assn. spokeswoman Stacey Mazer, said, however, that the burden has fallen on others as well, among them state employees, who are affected by caps on pay raises in about one-third of the states.