Flush days gone, states cut back

Midwest and Southeast are hardest hit by vanishing surpluses. Ten states consider raising taxes to fill gap.

Ohioans will not be getting the automatic tax rollback they've become accustomed to for the past five years.

New Yorkers are likely to see delays in billion-dollar projects - from construction in the depressed north to high-tech research at universities statewide.

California, which just months ago was looking for ways to spend $8 billion in surpluses, is now telling cities and counties to "cool it" on planned civic improvements, from swimming pools to additional policemen walking the beat.

Across the US, states are slamming the brakes on spending after a decade-long roll of fiscal good times. Though more irritated than panic-stricken, state officials are nonetheless scaling back plans in recognition that the US economy - and thus state tax revenues - may remain sluggish for the foreseeable future.

"After many years of surpluses, we are definitely entering a different economic period for the states," says Stacey Mazer of the National Association of State Budget Officers NASBO).

Just weeks from the start of fiscal year 2002 on July 1, about a dozen states are embroiled in legislative fisticuffs over revenue estimates made several months ago - but now proved erroneous. Five are dipping into reserves, and six others are considering it. At least 10 states are considering the "t" word (taxes). Another eight are rethinking the coming year, and practically all are confronting the sobering thought that the next few years will not repeat the fountain of plenty of the past decade.

"We are seeing lots of mid-year corrections - hurried, downward revisions in what states are taking in from taxes and what they feel they can do in programs across the board," Ms. Mazer says. "This has happened quickly, and is catching some states by surprise."

For the moment, the Midwest and Southeast - partly because of a reliance on tax income from manufacturing, which is in steep decline - are being hit harder than New England and the West. Also feeling the pinch are the East Coast states of New York, New Jersey, and Delaware.

Shaky stock market

The biggest culprits of the downward slide in revenues are sales taxes and capital-gains taxes. The dramatic plummeting of the Nasdaq over the past year has socked the latter directly, while indirectly affecting the amount consumers spend on everything from clothes to sports equipment to travel - and thus the amount states reap in sales tax.

Stock-market uncertainty also affects the confidence and regularity with which consumers spend, making it difficult to predict with accuracy how much states will take in.

"In my seven years at this position, I have never seen more uncertainty and mixed signals than we are getting on a daily basis about where the US economy is headed," says Scott Pattison, budget director for Virginia and next executive director of NASBO. "It has made both revenue forecasting and the contentiousness over what to do about it very unpleasant for those in state government."

Because states are more dependent on sales taxes than the federal government, they are more sensitive to economic downturns. The federal government relies mainly on income and payroll taxes, which are not affected as directly or as quickly when consumers slow their spending.

The slipping fortunes of the high-tech sector are also to blame for tax-revenue losses. In addition, rising healthcare costs - pushed by higher prescription-drug prices - leave states with less money than they expected for other priorities.

Many revenue officers, however, say the current period, while representing a turning point from previous years, does not yet qualify as a downturn, at least in their states.

Texas, Wisconsin, Delaware, and Virginia, for instance, all report continued growth at about 4 to 5 percent, down from 8 to 9 percent of the past two years.

"We are definitely slowing, but that is relative," says John Opperman, Texas budget director. "Things are dropping a bit, but 4 percent growth still ain't bad."

Part of the problem, say Mr. Opperman and others, is that budgets have been expanding for so many years that officials have become accustomed to increased projections. Such a situation makes a sudden or even gradual downturn all the more jarring. More than a dozen states report that they are asking for across-the-board cuts by state agencies of between 2 and 5 percent.

"You have a whole lot of policymakers elected at the state and local level who have never seen tough economic times, so they are having to deal with financially induced policy choices," says Wisconsin's secretary of administration, George Lightbourn. "It's difficult."

While many state politicians are staying away from the label "recession," others are looking it directly in the eye.

"We are, if not in a recession, as close to a recession as you want to be," said New York State Senate majority leader Joseph Bruno (R) to reporters last week. Legislators there - fueled by revelations that tax revenues are $75 million to $100 million below January predictions - are trying to reduce the size of the state's proposed $84.1 billion budget.

While Western states by and large are faring better than those in the East, California is rushing to rethink its budget.

Troubles among high-tech firms and the collapse of the technology-heavy Nasdaq index have resulted in a $3.5 billion "May revision" for the state budget proposal here, cutting into California's projected $8 billion surplus. That will mean postponing scores of projects, especially the building of schools, prisons, and highways.

Erasing initiatives

And it will mean complications for a plan to float bonds to repay state coffers drained by more than $6 billion in electricity purchases to help keep the lights on.

"A lot of the initiatives that we had in our January budget are now being taken off the table," says budget-office spokesman Sandy Harrison. "It is not a panic, but it is causing very hard work, difficult decisions, and prioritizing."

Despite across-the-board cuts being ordered in California and at least 20 other states, observers say the situation is not yet drastic.

"The revisions that these states are having to go through now are not so severe that they have to make the painful cuts of the late '80s and early '90s," says Nick Johnson, senior policy analyst for the Center for Management and Budget Priorities.

"But they are definitely scrambling to dip into rainy-day funds, move money around, patch things over, and hope that things will get better," Mr. Johnson continues. "The next year will be key. If this continues, they will eventually run out of smaller tricks and confront very hard choices for their economies."

(c) Copyright 2001. The Christian Science Monitor

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