US states crippled by boom and bust
NEW YORK - US states binged on tax cuts and spending in the boom years of the 1990s. Now they are struggling to cope with a fiscal hangover that has produced the worst budget crisis in decades.
From California to Connecticut, state administrations face an almost impossible task of trying to balance their books after one of the steepest plunges in tax revenue in living memory.
Nearly every one of the 50 US states is in the red, with the total deficit estimated at some $50-billion. Most must quickly take drastic steps to save money, as their laws require balanced budgets and "rainy-day" funds are exhausted.
The steps include reducing health insurance benefits or eligibility for low-income families, reducing eligibility for child-care subsidies for working families or raising tuition for students at public colleges and universities.
"It's definitely a dire situation," said Nick Jenny, a senior policy analyst of fiscal studies at the Rockefeller Institute of Government.
"If you look at the last couple of recessions from the point of view of state revenues, this one is quite a bit worse."
According to the Washington-based Center on Budget and Policy Priorities, total state tax revenue in fiscal year 2002 was some $38-billion lower than the previous year.
Official forecasts suggest that state revenues at best will hold steady in fiscal year 2003, meaning none of that money will be recouped.
"Indeed, the revenue hole could get even deeper," said Nicholas Johnson, director of the State Fiscal Project at the center.
The prelude to the current crisis came in the boom years of the late 1990s, when states witnessed astonishing revenue growth and ran record surpluses. The surging stock market boosted income tax revenues and fueled a dramatic rise in personal consumption, raising sales tax revenues as well.
The surpluses prompted nearly every state to make substantial income tax cuts, mostly permanent ones that could not easily be reversed when the growth trends justifying them turned out to be temporary and unsustainable.
More than $40-billion a year in revenue was lost in tax cuts enacted from 1994 to 2001.
Many observers have blamed state governments for the current crisis, but Jenny argues nobody could have been prepared for the scale and speed of the economic downturn.
"It's a bit tough to lay all the blame at the door of the state administrations," Jenny said.
"Given the budget surpluses of the time, they had little political choice but to offer tax cuts, and they didn't ignore the need to top up their reserve funds. But when your revenues suddenly drop off by 20%, the fact is it's hard to be ready for that."
Unsurprisingly, those states that cut taxes the most in the 1990s are now facing the most acute fiscal headaches.
In California - variously estimated as having the world's fifth- or sixth-largest economy - state officials are proposing deep reductions in education, health services and other programs to deal with a budget shortfall of up to $25-billion over the next 18 months.
"That's a hole so deep and so vast that even if we fired every single person on the state payroll - every park ranger, every college professor and every Highway Patrol officer - we would still be more than six billion dollars short,” said state assembly Speaker Herb Wesson.
While some states are looking to raise taxes in an effort to redress the deficit, others have adopted spending cuts as their weapon of choice.
In the next month, Arizona will indefinitely close 11 state parks, Oregon will scale back a program that helps abused children, and Illinois will shut down five prisons and work camps.
In Maine, the whole state government will close for three days to save money.
According to some estimates, the combination of tax increases and spending cuts proposed by the states could take some 40 billion dollars out of the US economy in the next year. This scenario has triggered calls for federal intervention.
"If you look at the overall picture, the federal government's job is to stabilise the national economy and not the states," Jenny said.
"But having the states raise taxes and cut spending just when the economy is at its worst is really not a great idea."
Supporters of increased federal aid to the states argue that would mitigate the damaging effect of the regional deficits on the national economy.
Whatever steps the states take to balance their budgets, quick-fix solutions can only exacerbate the crisis, Johnson warned.
"The short-term problem is that they must replace some $38-billion in annual tax revenue," Johnson said.
"The long-term problem is that if replacement revenues are not well-designed, states will continue to lose revenue as a result of structural problems that cause the gradual erosion of tax bases."
AFP
bday.co.za |
