Bush’s Growth Plan Leaves States in the Cold

Despite assurances as late as Monday that assistance would be included, President Bush’s growth package offers no help to some of the most prominent casualties of the recent stock bust and economic downturn -- cash-strapped state governments.

Indeed, the nation’s Republican and Democratic governors warned in a statement Tuesday that the proposal would have the perverse effect of shrinking already withered state tax revenue, forcing them to cut spending or raise taxes -- moves that would partially squelch the growth-spurring effects of the president’s plan.

“It would exacerbate the current state fiscal problem,” the bipartisan National Governors Assn. said in the statement.

Some Republican governors tried to put the best face on the absence of state aid in the $674-billion package.

“I don’t have big heartburn that it’s not in this plan,” said GOP Gov. Mike Huckabee of Arkansas, but “it will cause me heartburn if it’s not anywhere.”

However, White House budget spokeswoman Amy Call said late Tuesday that the administration has no plans to seek aid for the states. Huckabee had warned Arkansas voters that he might have to raise taxes even before Tuesday’s release of the president’s proposal.

California would likely have been the biggest winner of any federal aid because it faces by far the largest budget shortfall, an estimated $34.8 billion over the next 18 months. It’s therefore the big loser in the White House decision not to include new aid as part of its proposal.

Some observers speculated that was the administration’s intent: There is no love lost between the GOP president and Democratic Gov. Gray Davis.

Davis press secretary Steve Maviglio said Tuesday that Bush’s plan to eliminate the dividend tax could end up costing the state hundreds of millions of dollars. “We need something here and now,” Maviglio said. “We can’t wait for something to trickle down. The president is a former governor. He should get this, but he doesn’t.”

“States will have to make their own decisions about what they want to do” to fix their budget problems, Assistant Treasury Secretary Pamela F. Olson said Tuesday.

Analysts said Bush’s decision not to seek any state aid could have substantial economic and political repercussions.

The White House was reported last week to be studying a huge multiyear aid package for states. That was later reduced to a one- or two-year $10-billion proposal and, by last weekend, to a $6-billion measure. But the president included nothing when he unveiled his overall plan in a speech Tuesday in Chicago.

Plunging tax collections and spiraling Medicaid costs have put the states in their worst fiscal squeeze since World War II, according to the governors’ group, with governors and legislatures facing decisions on how to close almost $67 billion in shortfalls this fiscal year.

To the extent that they close the gaps with spending cuts and tax hikes, they could offset roughly two-thirds of the impact of the White House plan, which administration officials estimate would pump about $100 billion in extra funds into the economy this year.

But the governors association and some independent analysts said the effects of the president’s refusal to offer aid would go beyond this because it would shrink tax revenue and make it harder for states to borrow.

The Bush plan would slice states’ tax take by as much as $5 billion a year, according to the governors and the Center for Budget and Policy Priorities, a generally liberal Washington think tank. It would do this in two ways: by eliminating the federal tax on stock dividends, making it harder for states to continue taxing the payments themselves; and by excluding dividends from the adjusted gross income on which taxpayers pay federal taxes and on which many states base their own tax systems.

In addition, by making stock dividends tax-free, analysts said the plan would lure investors away from tax-exempt state and local bonds, raising states’ borrowing costs and adding still further to their budget gaps.

Even in advance of the Bush plan, state borrowing costs are on the rise because of investor worries about state finances.

When California, for example, issued a huge $11.5 billion in energy bonds last fall to cover wholesale power costs, lenders forced the state to take the unusual steps of setting aside nearly $2 billion as a reserve and promising to raise utility rates, if necessary, to assure bond payments.

Politically, Bush’s refusal to aid states could put Republican governors in the dicey position of supporting a president of their party at the expense of their own constituencies. GOP governors’ unease was reflected in state officials’ criticisms of the Bush plan.

“There was a promise that there would be some relief coming for the states,” said Mary Anne Sharkey, press secretary for Ohio’s GOP Gov. Robert A. Taft. “If you cut [federal] taxes, where are the benefits for the states?

“There’s a tremendous amount of pressure on us right now,” Sharkey added.

The bipartisan governors’ association said in a statement late Tuesday that “the nation’s governors regret that the president’s ... plan did not include ... fiscal assistance to states. The most powerful immediate economic stimulus the administration could have recommended would have been to provide assistance to states to forestall planned spending reductions and tax increases.”

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Times staff writer Dan Morain in Sacramento contributed to this report. Gosselin reported from Washington and Slater from Chicago.