Tax hikes and spending cuts produce surpluses in the states
Only a year and a half ago, the usually brimming California treasury had sprung a leak. Reeling from the revenue losses caused by Proposition 13 and brutalized by the recession, California was facing a deficit of $500 million. The state took drastic measures. It cut or froze social programs across the board and shrank its work force by 4,000. Energy spending was cut back sharply. Tax loopholes were plugged. Today, with its revenues buoyed by the recovery, California expects a budget surplus of anywhere from $889 million to $1.26 billion for the fiscal year ending next June.
California is a prime example of an impressive upturn in state fortunes. While the national deficit, already monstrous, continues to grow at an alarming pace, the vast majority of states are enjoying budget surpluses, the reward for years of belt tightening and budget slashing. The National Conference of State Legislatures estimates that the collective budget surpluses for 1984 total $5.3 billion, more than double the $2.1 billion figure of a year before.
A report released by the U.S. Treasury Department last week is even sunnier. The working paper predicts that if current spending and tax policies remain in effect for the next five years, state surpluses will reach $86.5 billion by 1989. Since such policies will probably be altered to reflect improved balance sheets, the huge surplus “would never actually be realized.” Nevertheless, the Treasury report concludes, the states would have “fiscal elbow room” to cut taxes or increase spending and could “comfortably” support current levels of services without raising taxes.
The states have always had more stringent fiscal controls than the Federal Government. By statute or constitution, 49 states require some form of balanced budget (the exception: Vermont). Even so, the surpluses have not come easily. Many states fired employees and froze salaries. Expenditures on highways and other construction were postponed. The National Governors’ Association (NGA) estimates that from 1981 to 1984, while federal outlays were increasing 10%, state spending went down an impressive 2%. Says Jesse Coles, South Carolina’s budget director: “If the Federal Government would cut back as we did, we could make some progress in reducing the deficit.”
In 1981, when Congress passed President Reagan’s threeyear, 25% tax cut, some 40 states were raising taxes. Income, corporate and motor-fuel taxes in Ohio, for example, went up a staggering 40% to 50%. In 1982, 30 states again raised sales, individual or corporate income taxes. Last year 43 states imposed new tax increases. Lawmakers did so at their political peril. In Michigan, two state senators who supported Governor James Blanchard’s 38% income tax increase in 1983 were recalled by irate voters. But while voters balked at the medicine, they appreciated the cure. Michigan’s deficit has shrunk from $1.7 billion to $250 million in the past two years, and a proposal to roll back taxes to 1982 levels was soundly rejected at the polls last month.
While Michigan resisted the reduction, other states with healthy surpluses are under pressure to trim taxes and restore program cuts. In New Jersey, where the 1985 surplus may wind up as high as $800 million, politicians from both parties have put toxic-waste cleanup at the top of a long list of demands. New York Governor Mario Cuomo, who reports a surplus of $207 million, is designing a broad tax-reform plan that will include income tax reductions. In California, Governor George Deukmejian plans to pump money into education, highway construction and environmental projects. Says William Hamm, an analyst for California’s legislature: “It’s difficult to build reserves when times are bad, but it’s hard to justify them to the public when they get too large.”
State leaders are more concerned about the Administration’s proposed budget cuts, which they feel could wipe out state reserves in one swoop. Reductions in the federal contribution to state and local governments would force states to scale back many popular programs. In New York, officials say the Reagan budget proposal could cost the state $170 million in Medicaid funds, $458 million in revenue sharing, $271 million in sewage-system construction grants and $67 million for child-nutrition programs. That would turn a modest surplus into a deficit of about three-quarters of a billion dollars. The shortfalls would also be severe in California, where federal dollars amount to 31% of the $43.5 billion budget.
At a conference of Republican Governors in Des Moines last week, there were frequent complaints that Washington was not dealing fairly with the states. Said David Runkel, a spokesman for Pennsylvania Governor Richard Thornburgh: “We had to take certain steps since 1980 to reduce our own budgetary imbalances. Should our success now be used by the Federal Government to say they can take advantage of it?” Agreed Raymond Scheppach, executive director of the NGA: “The Governors want to be helpful in trying to get the deficit down. But states have already made a major contribution to that end in the last three years.”
The states argue that their fiscal well-being is fragile. Their aggregate surplus is less than half the prerecession total of $11.2 billion in 1979. Some 40% of the current black ink is concentrated in just five states: California, New Jersey, Minnesota, Texas and Wisconsin. Moreover, financial experts consider a healthy surplus to be 5% of total state spending; this year’s surpluses average between 3% and 4%. The reserves are highly sensitive to economic fluctuations. Explains James Burton, executive secretary of California’s commission on state finances: “A small dip in the national economy can wipe us out fast.”
Since Reagan’s cuts are bound to affect the coffers of every state, officials are trying to use their ingenuity to soften the blow. Says California Analyst Hamm: “It’s not realistic for us to say [to Washington], ‘Don’t touch us, but get rid of the deficits.’ We should be asking ourselves, ‘What can we give up that will hurt us the least?’ ” -By Jacob V. Lamar Jr. Reported by Patricia Delaney/Washington and Richard Woodbury/Los Angeles, with other bureaus
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