Tax Hikes Barely Balance State Budgets, Report Finds

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ORLANDO, FLA.--The unprecedented $18 billion in politically painful tax increases approved by state legislatures this year will buy little more than break-even budgets, lawmakers from across the nation were told here last month.

The continuing stress on state budgets caused by the recession and the prospect of more dismal months ahead were underscored in a report released by the National Conference of State Legislatures at its annual meeting here.

Despite tax increases that set a single-year record, the report said, reduced programs and moves to dip into reserve or "rainy day" accounts were also common themes in 1991 legislative sessions.

The combination of tax hikes and one-time accounting adjustments by several states is expected to produce total new revenues of more than $20 billion. Nevertheless, many states will open their legislative sessions next year facing yet another round of tough decisions.

"Basically, those taxes are just filling in a hole," said Anthony M. Hutchinson, one of the authors of the survey. Despite forecasts of a slowly improving national economy, he added, states will find it "extremely difficult" to stick to their spending plans for the new fiscal year.

"It's going to be a very, very tight budget year," Ronald K. Snell, the N.C.S.L.'s fiscal-program director,

told lawmakers. "The slightest downturn in the economy is going to create great difficulties for you. For very many states, the margin between a balanced budget and a deficit is very narrow."

Mid-Year Cuts Ordered

Reviewing this year's legislative actions, the survey found that while many states made an effort to spare education funding from the worst cutbacks, it, along with other programs that make up the bulk of most state budgets, did take a hit.

Among the 45 states included in the preliminary report, actual spending on K-12 education in fiscal 1991 was down nearly 5 percent from the amount states originally appropriated. The final total was still up 3 percent from fiscal 1990 spending, although that increase was below the rate of inflation for fiscal 1991, which the report pegged at 4.3 percent.

Further, the survey found, states planned to compensate for fiscal 1991 cutbacks by raising this year's appropriations more than 9 percent above the final 1991 levels.

In each category, the figures for elementary and secondary education are better than those for higher education, which, after being cut by 6.7 percent during the course of fiscal 1991, finished the year with less than a 1 percent increase over 1990. Fiscal 1992 appropriations for state colleges and universities, meanwhile, were up slightly more than 2 percent nationally.

Spending for Medicaid and corrections continued to outpace other categories. States planned a nearly 12 percent increase for the federal-state health-care program, and appropriated an increase of nearly 8 percent for prisons. Both items also grew at double-digit rates between 1990 and 1991, the N.C.S.L. found.

Also widespread were reductions in states' already low reserves, which the N.C.S.L. called "a sign of significant weakness." Nationwide, the amount held in rainy-day funds dipped from about 3.9 percent of state budgets at the end of fiscal 1990 to 1.9 percent this summer. Fiscal experts generally advise retaining a balance of at least 5 percent.

State finance officers predict a rebound in reserve funds in fiscal 1992, but also point out that much of the increase would be accounted for by only two states, California and New York, both of which face tight economies that make excess funds highly vulnerable.

Widespread Layoffs

Unlike the tax increases, which were felt most severely in a few large states-California and Pennsylvania alone account for nearly $10 billion--a considerable number of states were forced to order layoffs of government employees.

According to a recent Associated Press survey, 23 states laid off a total of more than 14,000 workers between January and July. Many states also plan reductions in the government workforce in the year ahead.

Ongoing fiscal straits may become a fact of life for lawmakers over the next few years, predicted Lawrence Chimerine, a prominent economic forecaster and the president of Radner Consulting Services.

Calling the current economic rebound "microscopic," Mr. Chimerine warned lawmakers here that deeprooted problems--ranging from overbuilding and banking troubles across much of the country to widespread layoffs of managerial employees-indicate that the recession will be followed by a sputtering expansion rather than the economic surge some have foreseen.

"The overwhelming evidence shows that the best we can hope for is a slow, gradual, uneven recovery, and, with finances the way they are, it doesn't take much to push you back into stagnation," he said. "Our advice is don't count on an enormous bonanza, but I do think the worst is probably over."

Vol. 11, Issue 01, Page 29

Published in Print: September 4, 1991, as Tax Hikes Barely Balance State Budgets, Report Finds
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