$10 Billion in Tax Hikes Planned, State Survey Finds

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Washington--State officials across the country have chopped more than $8 billion from this year's budgets and will increase taxes by $10.3 billion, according to a survey released here last week by the National Governors' Association.

Even then, however, state leaders report that they are still unsure whether those efforts will be enough to keep them out of the red.

The report says that states are facing their worst financial troubles since those caused by the severe economic recession of the early 1980's. The current woes, it suggests, are due to a combination of the recession, which has further slowed already-lagging tax collections, and the skyrocketing cost of Medicaid and other health-care programs.

"The [1991] recession has been less severe ... but has hit state budgets harder" than earlier downturns, said Raymond C. Scheppach, the nga's executive director.

Without an improvement in the economy by mid-year, Mr. Scheppach warned, many states will once again be forced to resort to severe budget cutting.

The nga reported that 29 states made mid-stream cuts in their fiscal 1991 budgets. In order to balance next year's ledgers, 26 states have opted for tax increases that collectively will amount to the largest since the survey began in 1978.

Aside from California, which is struggling with a budget deficit of unprecedented magnitude, most of the economic gloom has been held east of the Mississippi River, the survey found. Nevertheless, the budget crunch is being felt nationwide, and is taking its hardest toll on many large states.

Although fiscal experts generally recommend that states keep fiscal reserves of at least 5 percent of their budgets, the nga reported that state balances at the end of the fiscal year will be about 2 percent of total spending. Removing Alaska, which has seen a rise in oil-related revenue, the balance shrinks to 1.5 percent.

Among other statistics presented in the report:

Budget growth from fiscal 1991 to fiscal 1992 is expected to be about 4.8 percent, compared with an average of 8.25 percent during the 1980's.

Five states implemented mid-year tax increases to help make up budget shortfalls.

Of the major state taxes, corporate-income taxes are recording the most sluggish performance, falling below expectations in 31 of the 46 states where they are collected. Personal-income taxes and sales taxes are also below expectations in more than half of the states where they are levied.

At the same time that tax revenues are faltering, many states are experiencing burgeoning Medicaid costs. The nga reports that expenditures are up by 25 percent this year for the program.

Mr. Scheppach said the rise, which comes after last year's 18 percent cost increase, is affecting other state spending priorities.

While states are showing an "increasing commitment" to funding increases for education programs, the survey showed that fiscal constraints have led many officials to claim that their hands are tied.

"The problem they're having is they want to put more money into education, but what they've got is Medicaid and prison overcrowding on the other side," Mr. Scheppach said. "Those two things are sort of running away with state budgets."

"So that's the struggle," he continued. "How do you hold back on those two things and begin to put money into education and infrastructure and long-run investment types of things?"

While it does not specify cuts by program, the nga report said targeted reductions have been the most common budget-cutting strategy, employed in 24 states. Twenty-two states have imposed hiring freezes, and 19 have frozen travel by state employees. Eleven governors have recommended trimming the government payroll through layoffs, while seven have proposed or implemented furloughs.

The survey shares its bleak findings with other recent examinations of state finances.

In testimony before the Congressional Joint Economic Committee, Steven D. Gold, director of the Center for the Study of the States in Albany, N.Y., alerted federal lawmakers that the budget troubles may linger.

"The state fiscal problems of 1991 are not a one-shot phenomenon," Mr. Gold said. "The 1990's are likely to be considerably more stressful for states than the last half of the 1980's."

"A prompt end of the recession4would be very helpful in reducing some of the stress," he argued. "It will not, however, be sufficient by itself to return the budgets of many states to fiscal soundness because they have structural deficits, with spending increases needed to maintain current services rising faster than revenue from the existing tax system."

Mr. Gold also predicted a rise in local taxation and said that, in a climate of voter resistance to tax increases, some politicians may be tempted to use school-reform proposals as a way of generating support for obtaining new revenue to support non-educational programs.

"With the two biggest causes of higher taxes being increased spending for Medicaid and corrections, tax increases could be hard to sell to middle- and high-income voters," he explained. "Unless an effective educational campaign is launched, they may not see any improvement in service levels commensurate with the higher taxes. Much depends on how skillfully elected officials explain the need for tax increases."

Staff writer Millicent Lawton also contributed to this story.

Vol. 10, Issue 31

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