Washington, States Pass Buck on Budget Crises, Dwindling Services

It’s difficult to say who has more nerve: state officials pushing Washington to rescue them from a budget crisis significantly of their own making, or federal officials pushing states to shoulder the costs of the federal education reform law that President Bush and so many congressional candidates touted in last month’s election.

Both sides are refusing to face the mismatch between their goals and resources. Both want voters to believe they can simultaneously cut taxes and maintain popular services.

In Washington and the state capitals, the underlying problem is the same: Mounting spending needs and the end of the boom years have made the tax cuts adopted since the late 1990s unsustainable. Yet neither Bush nor most governors want to admit that. So, whenever possible, each is trying to shift costs onto the other.

Everyone is passing the buck because no one wants to raise one.

Start with the states. Last week, the National Governors Assn. warned that this may be the toughest year for state budgets since World War II. The governors predicted “draconian” cuts in the months ahead, especially in health care for the poor -- an alarming prospect, as the number of Americans without health insurance is rising again.

The economic slowdown, exploding health-care costs and the aftermath of last year’s terrorist attacks have all contributed to the budget mess. But the states are hardly blameless.

Spending is part of the problem. In some instances, states cemented large spending increases while revenue was rising in the late 1990s. But Ray Scheppach, executive director of the governors group, says that from 1995 through 2000, overall state spending increased 6.5% annually -- about the same as over the previous two decades. And states nearly tripled budget reserves during the fat years.

The more fundamental change came on the tax side. From 1994 through 2001, 43 states enacted major tax cuts. In an eye-opening study last month, Nicholas Johnson, director of the state fiscal project at the Center on Budget and Policy Priorities, calculated that those tax cuts are costing states $40 billion in lost revenue every year.

That’s equal to three-fifths of the $67-billion deficit the National Conference of State Legislatures says the states are facing in the current budget year, which suggests that many states are taking on water now partly because they cut such big holes in their own boats.

Another revealing fact from Johnson’s study reinforces that conclusion. He compared the budget deficits this year in the 10 states that enacted the deepest tax cuts in the 1990s with the 10 that cut taxes the least. Those in the first group included New York, New Jersey and Michigan; the second group included Nevada, New Hampshire, and Tennessee.

Today, the more aggressive tax-cutting states are drowning in red ink: They face budget deficits for the upcoming budget year equal to a daunting 13% of state spending. Meanwhile, the states that cut taxes modestly in the 1990s are anticipating deficits equal to just 1% of spending.

As they struggle with their deficits, states can make strong claims for several kinds of help from Washington. Homeland security is a national responsibility, and Washington should provide states with more dollars to respond to attacks. And the health-care system is descending into such crisis that it’s clearly in the national interest to provide states more dollars to cover the uninsured.

But it’s difficult to see why Washington, struggling with deficits itself, should bail out state officials who won’t take the tough step of reconsidering the tax cuts that have contributed to their budget woes. Governors and legislators bought themselves popularity in the late 1990s with extravagant tax reductions; Washington has no obligation to spare them the consequences of those decisions.

Parents do no good by writing a check when their kids’ credit card debts get too big because they virtually guarantee a repeat; the same analogy applies here. Even if Washington extends the states a lifeline today, more crack-ups are almost inevitable unless states restore a level of taxation sufficient to fund the health-care, education and homeland security services their residents expect. “The question is: Can states continue to meet the cost of governing over the long term with the current revenue structure?” says Johnson. “I think the answer is no.”

The same question could be asked of the federal government after the $1.35-trillion, 10-year tax cut Bush pushed through Congress last year. One small, but telling, example last week suggests the answer in that case is also no.

Bush’s Education Department took a welcome step by announcing tough regulations meant to ensure that states and cities comply with the goals in last year’s education reform bill.

To put it charitably, local educators have been unenthusiastic about many of the bill’s key provisions. In particular, most districts have virtually ignored the requirement that they let students from under-performing schools transfer to better public schools.

In the regulations, the Education Department admirably stripped away one of the districts’ major excuses: It said a district can’t refuse transfers by arguing that it lacks space in better schools. But when asked what cities with legitimate space shortages (like Los Angeles) should do, the department breezily advised them to build more schools and hire more teachers.

This from an administration that wants to eliminate the $1.2-billion federal program to help subsidize school construction and freeze federal aid for hiring more teachers. The truth is that even if Bush wanted to help, he could only respond to these needs by diverting taxes collected for Social Security because the rest of the federal budget -- under the weight of war on terrorism, recession and his tax cut -- is looking at big deficits for at least the next decade.

The same problem makes it difficult for Bush to do more than gesture at the rising number of Americans without health insurance. And it makes Social Security reform a lost cause even if the two parties could agree on a plan. From Sacramento to Albany to Pennsylvania Avenue, the costs of the nation’s exorbitant tax-cutting binge are growing more difficult to ignore.

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Ronald Brownstein’s column appears every Monday. See current and past Brownstein columns on The Times’ Web site at: www.latimes.com/brownstein.