Creativity counts as states plug budget gaps

By Ralph Thomas
Seattle Times Olympia Bureau

7/24/03

SAN FRANCISCO, CA— When it comes to balancing state budgets, there's almost no such thing as a completely new idea.

State budget shortfalls Here is a sample of some tax and fee increases adopted this year by states to help close budget shortfalls: Alaska: New $5 fee on studded tires and $2.50 fee on regular tires ($5.6 million); increased business licenses from $25 to as much as $100 ($8 million.). Arkansas: Added 3 percent surcharge on personal and corporate income taxes for next three years ($94 million). Idaho: Increased sales tax from 5 percent to 6 percent for next two years ($320 million). Illinois: Increased riverboat-gaming taxes ($187 million). Massachusetts: Closed various corporate tax loopholes ($280 million); imposed 28 fee increases and new fees, including $25 surcharge on speeding tickets, boosted firearm-registration fee from $25 to $100 and increased marriage-license fee from $4 to $50. New York: Increased income tax for two years on high-income households ($2.9 billion); raised sales tax from 4 percent to 4.25 percent ($1.2 billion); removed sales-tax exemption for clothing, except during holidays and for shoes under $110 ($467 million); imposed 37 fee increases or new fees. North Carolina: Extended 2001 "temporary" sales-tax increase for another two years ($720 million). Ohio: Increased sales tax from 5 percent to 6 percent ($2.5 billion). South Dakota: Imposed 4 percent excise tax on cellphones ($12 million).

 

But rarely do you see so many different budget-balancing tactics deployed in the same year.

New York raised taxes on the wealthy and ended a sales-tax exemption on food. Idaho increased its sales tax and doubled cigarette taxes.

Illinois put a state office building up for sale. North Carolina changed the definition of "child," lowering the age people can claim child-care income-tax credits from 23 to 16 years old. And Minnesota figures to net $5 million in fees from bars staying open past 1 a.m.

With nearly every state wallowing in the deepest deficits since World War II, governors and legislators across the land have been trying just about every fiscal trick in the book, according to a report released yesterday at the National Conference of State Legislatures (NCSL) annual conference in San Francisco.

In Washington state, lawmakers have wrestled in the past three years with about $4 billion in shortfalls in the budget that pays for day to day operation of state government and have closed the gap without raising general taxes.

In the past three years, the states have plugged budget gaps totaling nearly $200 billion, said Corina Eckl, NCSL's fiscal-affairs program director.

"I just think it's staggering," said Eckl. "Virtually no state is going unscathed in this economic decline."

After seven years of cutting taxes by roughly $37 billion, this is the second straight year states have collectively raised taxes.

Most states were forced to cut spending — or at least stem the ever-rising cost of government, especially programs such as Medicaid and education.

Some states are borrowing their way out and most have all but drained their once-flush reserves. There have also been less-conventional budget fixes: accounting gimmicks such as delaying school payments from one fiscal year to the next or selling bonds to pay pension costs.

While there are signs of an economic rebound, many states — including Washington — are likely to face more deficits in the next few years.

And for most states, the easy options are gone. For instance, three years ago, the states had nearly $50 billion stashed in reserves. They now have about $12 billion set aside, thanks partly to the recent $20 billion bailout from the federal government.

"For a lot of states, next year's legislative session is going to be every bit as hard as this past one, because they haven't fundamentally solved their budget problems," said Nick Johnson, who tracks state fiscal matters for the Center on Budget and Policy Priorities.

Taxing trends

Last year, when states began trying to fill their shortfalls, they relied heavily on politically palatable "sin taxes."

A record 20 states increased cigarette taxes last year by a combined $3 billion. So far this year, a dozen states have increased cigarette taxes by less than $500 million.

But more states are increasing broad-based sales and income taxes that hit the pocketbook of many more voters. Collectively, the states so far have increased taxes and fees by nearly $7 billion this year, according to the NCSL report.

And that's not counting six of the worst-off states, where lawmakers are deadlocked on budget fixes. By the time states such as California, Oregon and Nevada finish their budgets, the tally on new taxes by the states could top $15 billion. California alone is facing a $38 billion shortfall this year.

Still, at least half of the states — including Washington — shied away from raising taxes.

That's partly because many politicians were elected on no-new-taxes promises — and most remember what happened in 1994, when Republicans nationwide rode into power largely by bashing Democrats for their tax-and-spend ways.

In a twist, many of the biggest tax increases this year were pushed by conservative Republican governors.

Alabama lawmakers, under pressure from the state's Republican governor, approved a massive tax overhaul that would boost collections by $1.2 billion. But it still must win approval from the voters.

Idaho Gov. Dirk Kempthorne, a Republican who has signed dozens of tax cuts since taking office in 1999, shocked his allies in the GOP-dominated legislature when he announced early this year that it was time to start raising taxes because the alternatives were too harmful.

"I wasn't going to go to a four-day school week, as we've seen some doing," Kempthorne said last week. "I wasn't going to release inmates at the same time we're cutting back (on police spending)."

After battling through the longest legislative session in state history, Kempthorne's plan for a temporary sales-tax increase and doubling of the cigarette tax passed largely intact.

Kempthorne, who is not seeking another term, predicted many states that did not raise taxes this year will be forced to next time around. But raising taxes will be even harder next year, an election year.

"This was the time to take the medicine," he said.

Feasting on fees

In Massachusetts, Republican Gov. Mitt Romney went out of his way to stick to his no-new-taxes pledge. His new budget relies on more than 24 fee increases that together will raise more than $350 million this year.

Massachusetts isn't alone. So far, at least 30 states have imposed more than 200 fee increases or new fees that will raise nearly $2.6 billion. That's nearly triple the total fee increases by states last year.

"That simply reflects in most states how difficult it is to raise taxes," said NCSL President Angela Monson, a Democratic state senator from Oklahoma. "In my state, it's almost impossible."

But others said it is a disturbing trend because fees, like sales taxes, are regressive, meaning they hit the poor harder than the wealthy.

Other states found ways to avoid broad tax increases or to offset the need for spending cuts.

In Illinois, lawmakers voted to put a prominent state office building in Chicago up for sale and then lease it back from the buyer. "That's one step from having a state yard sale," said Eckl.

There was also a big push in many states, including Washington, to expand gambling. But only a few states have done so. Pennsylvania lawmakers scrapped a proposed tax increase and instead opted to allow thousands of slot machines at horse racetracks. Once in place, Pennsylvania's new slots are projected to bring in $1 billion a year.

Meanwhile, lawmakers in many states are keeping a close eye on a landmark budget fight in Nevada, where Republican Gov. Kenny Guinn has been trying to push through a record $800 million tax increase. Unable to get enough legislative support to meet the state's constitutional two-thirds vote requirement for tax increases, Guinn went to court, arguing lawmakers were violating their constitutional obligation to fund education.

The Nevada State Supreme Court earlier this month agreed and tossed out the state's supermajority vote requirement.

Already there is talk of similar rulings in other states, especially the 12 other states, including Washington, that require supermajority votes for tax increases.

So far, 31 states have imposed across-the-board cuts to government programs, according to the NCSL report. In most cases, they were to proposed increases and will not result in actual reductions.

About a dozen states are projected to spend less this year than they did last year, and overall state spending is projected to grow by about 1 percent this year. Spending in Washington is projected to grow by about 2 percent, despite cutbacks by the Legislature.

Self-inflicted budget pain?

Eckl said the modest spending growth, which is less than inflation, is an indication of how cautious states are being. But others see it as a sign that most states have not really come to grips with their budget problems.

Conservative lawmakers and some economists contend the states' budget troubles were mostly self-inflicted, largely due to the spending increases most states approved during the booming 1990s.

"The pain in state government is not only because of the economy," Sung Won Sohn, chief economic officer of the Wells Fargo Bank, told legislators this week. "That's only part of the story. ... We spent a lot of money. And we spent and spent and spent."

But in another new report, the NCSL points out that state spending grew at roughly the same pace as the overall economy.

And many lawmakers said the big spending increases of the 1990s were driven largely by factors out of their control, such as annual double-digit percentage increases in Medicaid costs.