State Deficits Remain High While Taxes Surge

Last year’s elections produced nearly two dozen new governors–the largest turnover in years. But they didn’t have long to celebrate their victories. Their first day on the job coincided with one of the most pressing state fiscal crises in decades, continuing into 2003.

The latest budget figures released by the American Legislative Exchange Council (ALEC) show little improvement. California’s $31.4 billion deficit leads the nation. Combined, the top 10 states are at least $70 billion in debt. Total state budget deficits for fiscal years 2003-04 are now approaching $90 billion nationwide, with deficits in 2004 over $80 billion alone. According to ALEC, it’s time for each state to “own up to its debts and evaluate the budgetary process.”

“These (deficit) figures are simply staggering,” said Michael Flynn, ALEC’s director of policy and legislation. “But what’s more alarming is that few states have yet to responsibly address this self-inflicted crisis, a decade in the making, which finally hit home well over a year ago.”

According to ALEC, “state tax increases surged by 48 percent in the first half of 2003, increasing from $8.8 billion in 2002 to a staggering $13.1 billion total in 2003.”

“Tax increases are the wrong answer to state budget woes,” said Chris Atkins, ALEC’s director of tax and fiscal policy. “It’s instructive to remember the recent past: States embracing major tax hikes to close budget gaps during the early 1990s subsequently recovered more slowly from economic recession. Not only did the tax increases retard job, income, and economic growth, but they also perpetuated state budget deficits longer than states that did not raise taxes.”

According to the ALEC Mid-Term 2003 report, the current state budget climate reveals four trends:

• Tax increases are getting bigger. In 2002, 21 states raised taxes by a total of $8.8 billion. In 2003, 20 states have raised taxes by $13.1 billion–an increase of 48 percent. Half the states that raised taxes in 2003 also raised taxes in 2002: Connecticut, Illinois, Maryland, Nebraska, New Jersey, New York, North Carolina, Ohio, and Utah.

• States are relying more heavily on borrowing to balance their budgets. Total state borrowing in FY 2002, including general obligation, special revenue, and tobacco settlement bonding, was $30.2 billion. In FY 2003, that figure jumped to almost $68 billion, an increase of 125 percent.

• Spending is increasing, despite tax hikes and borrowing. States cut more than $8 billion from their projected FY 2003 budgets this year. But lowering projected spending is not the same thing as cutting spending. Total spending by state governments in 2003 will be more than $11 billion higher than spending in 2002.

• Cigarette taxes were utilized more frequently in 2002. Twenty states raised cigarette taxes in 2002 and another 12 did so in 2003. States continued to use tobacco settlement funds to shore up state budget deficits. Several state attorneys general even intervened–on the tobacco industry’s behalf–in an Illinois case that threatened to make several tobacco companies insolvent. Asked ALEC, “Could it be any clearer that the states are hooked on tobacco money?”

“In the 2002 sessions,” reports ALEC, “many lawmakers gave approval to short-term solutions–like tobacco settlement securitization, general borrowing, and accounting tricks–designed only to erase budget deficits in the short term.”

“The states were essentially betting that an economic recovery would yield higher tax revenues in the near future, allowing them to maintain current levels of spending,” said Atkins. “The economy betrayed state lawmakers, however, and the short-term solutions adopted in 2002 proved even more disastrous to state budgets in 2003. Unfortunately, lawmakers took the same wager in 2003, voting for even more taxes and borrowing.”

The liberal-leaning National Conference of State Legislatures (NCSL) attempted to put a more favorable spin on a dismal situation. In its mid-year update NCSL noted, “the states that have balanced their budgets amid this fiscal crisis–the worst in decades–have done so largely without relying heavily on broad tax hikes.”

“Raising taxes or clamoring for a federal bailout is not the answer, and in fact will only perpetuate and deepen the current fiscal crisis,” said ALEC’s Flynn. “What’s required is a candid and sober evaluation of each state’s medium and long-term costs of operating government. It’s only by reducing the size and scope of government in strategic and imaginative ways that each state finds a way out of its woes.”

ALEC is the nation’s largest bipartisan, individual membership organization of state legislators, with more than 2,400 legislator members from all 50 states.

John Skorburg is managing editor of Budget & Tax News. His email address is [email protected].