Cash-Strapped States Favor Cutbacks Over Tax Hikes

Revenues are down and expenses up in almost every state in the union, but only a handful of statehouses will consider targeted tax increases to fill the gap, according to a study released Thursday by the National Conference of State Legislatures.

Instead, state officials are delaying construction projects, tapping reserves, laying off workers and cutting social services.

The latest figures on the deepening fiscal crisis in the states were released three days after President Bush presented to Congress a federal budget proposal that would require some new spending by the states.

Thursday’s report shows why officials in California and some other states doubt whether they will be able to come up with the money needed to match federal funds even for programs they support, such as prescription drug coverage for low-income seniors.

Revenues have fallen below projected levels in 45 states and the District of Columbia, while spending is above budgeted levels in 28 states and the district, according to the survey of state legislative fiscal directors.

“And for some states, it’s going to be even worse next year,” said Corina Eckl, fiscal program director for the conference of legislatures.

Indeed, 37 states and the district face budget gaps in fiscal 2003. In California, where spending is on target but general fund tax collections for this fiscal year are expected to fall $5.5 billion short, an $8-billion budget gap is projected for next year.

The legislatures of California, Oregon and Arizona are holding special budget-cutting sessions this month. Already, 39 states have imposed budget cuts or spending delays and 25 have tapped their reserve funds. Thirty states have employed other cost-saving measures, including hiring freezes, debt refinancing and requiring state employees to pay more of their health insurance premiums, the survey found.

The most common source of spending overruns is Medicaid, the state-federal health insurance program for the poor. Increased need and spiraling health-care costs busted the Medicaid budgets of 28 states, according to the report, and the federal government expects demand only to increase.

This year, 39 million Americans were eligible for Medicaid; next year the number is expected to be 40.4 million--adding still more stress to state budgets.

Only four states--North Dakota, Texas, West Virginia and Wyoming--are expected to meet both their spending and revenue targets this year.

While the budget gaps differ in size from state to state, they are caused in large part by the same economic cycle.

As early as December 2000, the downturn in the national economy began generating a decline in state sales tax and income tax collections, which account for an average two-thirds of state revenues, Eckl said. Then came the terrorist attacks of Sept. 11, “and the bottom fell out,” she said.

At the same time, corporate layoffs raised demand for state government services, especially health care and temporary assistance.

The downturn hit states particularly hard because they had already cut revenues, Eckl noted. Because of tax cuts enacted by every state over the last seven years, states have lost a total of $35 billion in tax revenue, Eckl said.