Balanced Budget Could Shift Cost Burden to States

Pledges to cut taxes, boost defense spending, and protect Social Security leave few choices

AFTER two centuries of debate and a handful of near misses, Washington lawmakers appear poised to pass a balanced-budget amendment to the United States Constitution.

Passage would mark a major success for the Republicans, though the measure would still face approval by state legislatures before becoming law. But critics claim the states would do well to take a hard look at the amendment when it comes their way. That's because a balanced-budget amendment might force huge reductions in federal outlays to states for everything from highway construction to Medicare - leaving those governments to slash programs or raise state taxes to make up the difference.

``The requirement to balance the budget gives us an incentive to be unkind to the states,'' says Rep. Barney Frank, a Democrat from Massachusetts.

Not so, says says Rep. Joe Barton (R) of Texas, the chief sponsor of the balanced-budget amendment proposed in the Contract. ``I guarantee that as long as we have a Republican majority in Congress, we won't increase the burden on states,'' he says.

The basic problem, of course, is that actually balancing the budget is an extremely difficult task.

Though its final form isn't set, and the issue is a matter of some controversy, the amendment may contain restrictions on the ability of the federal government to raise taxes. In any case, it appears unlikely that any House headed by Speaker Newt Gingrich of Georgia would approve tax increases.

This means that in order to balance the budget by 2002, in line with the amendment's timetable, Congress will need to find a total of $1.2 trillion in deficit savings. Complicating this task are other Contract promises to actually cut billions in taxes over the same period and increase defense spending.

Cut funding to states

To achieve this, according to the US Treasury Department, Congress would among other things have to cut federal outlays to states by $340 billion a year. The Center on Budget and Policy Priorities, a moderately liberal group in Washington, in a yet-unreleased report, similarly predicts that federal grants to states will have to be cut deeply.

If defense and Social Security are exempted from cuts, as is likely under the current GOP leadership, all other areas of the budget would have to be reduced by 30 percent, the center estimates. But the federal government would be reluctant to reduce significantly funding for such programs as border patrols, embassies, and pensions for veterans. That leaves grants to state and local governments subject to even deeper cuts, the center predicts.

As a result, states may well have to increase tax rates to offset revenue shortfalls.

California, Treasury predicts, would have to increase taxes by 12.6 percent to offset $10.6 billion in lost annual grants for such programs as Medicaid, welfare, and education. New York would have to increase taxes by 23.8 percent to offset $11.2 billion in lost annual grants.

Some Republicans think putting fiscal pressure on the states might be a good thing.

Accountability

Annelise Anderson, a senior fellow at the Hoover Institute and former associate director for economics and government during the first Reagan administration, says that an amendment to the Constitution could force state leaders to be more selective of programs and more accountable for the expenditures they advocates.

``State officials are who you really want on the firing line, because they are closer to the people,'' Ms. Anderson says. ``States would be more like laboratories of democracy, experimenting in what works ... and finding more effective ways to deliver services.''

Despite the gloomy reports from Treasury and others, many governors seems to support a balanced-budget amendment. But they seek certain protections, among them a ban on so-called unfunded mandates - costly federal regulations that Washington hands down without the means to pay for them.

Ban on mandates

Congress is debating such a ban, which many Republicans argue should be included in the balanced-budget amendment, or be passed as a law before the amendment.

But the Center on Budget and Policy Priorities says prohibiting unfunded mandates would provide false security; it would not protect the states from having to offset federal revenues cut from such cost-sharing programs as Medicaid.

For this reason, some governors look beyond the mandates issue and seek assurances that if they support a balanced-budget amendment, Washington lawmakers won't shuffle the burden to them and wash their hands.

``The governors are willing to take tough stances, but there must be a partnership,'' says Gov. Howard Dean, Democrat of Vermont and chairman of the National Governors Association. ``If we are to face down the Constitution, everybody needs to hold hands and jump off the bridge in a bipartisan fashion.''

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