STATES IN CRISIS

States are facing their worst fiscal crises in over half a century. Forty-two states, representing 93 percent of all state spending, are facing a combined deficit of a whopping $60-$85 billion for the 2004 fiscal year, a shortfall twice as large as the ones states faced in the early 1990s. This is in addition to the $50 billion gap states had to close for 2003.

Over the past two years, states struggling to close previous budget deficits have exhausted the easier and less painful measures, such as using rainy-day funds and increasing cigarette taxes. With few choices left, states are now being forced to make harder decisions. Vital spending to programs such as education, Medicaid, Temporary Assistance to Needy Families (TANF) and the criminal justice system will be cut. Taxes are likely to be raised, and many states are laying off employees, instituting hiring freezes and holding down pay and benefits.

What Went Wrong?

During the boom years of the mid-1990s, states had budget surpluses. They passed massive tax cuts and increased spending. When the current recession hit, climbing Medicaid costs and decreased tax revenues forced states to scramble for funding. States used up their rainy-day funds quickly, assuming that the recession would not continue into the 2004 fiscal year. The states’ dilemma has been made worse by federal budget cuts, costs associated with homeland security and the stagnant stock market.

A Plea to the Federal Government

Resolving the state budget crisis is not impossible. Many state governors are calling for federal assistance. States want federal fiscal relief, especially for Medicaid, and some believe such assistance will be more effective in stimulating the economy than the proposed federal tax cuts. States urgently need funding for individual state programs and for federally mandated programs, such as President Bush’s “No Child Left Behind” education act, the new election reform law, Medicaid, welfare and homeland security. The federal government can ease this difficult situation by providing aid for these important state-funded programs and by increasing the federal matching rate for Medicaid.

The Bush Administration’s Deaf Ear

President Bush’s recently unveiled economic stimulus package includes little to no help for the states. Instead, Bush chose to craft a plan that disproportionately benefits the wealthy. Federal tax cuts would reduce state revenue because of the linkage between many state tax codes and federal taxes. States would then be forced to raise taxes and make more budget cuts.

In 2002, a bi-partisan Senate bill offering relief to the states was not supported by President Bush or Republican Senators. The bi-partisan National Governors Association issued a statement regretting that Bush’s plan did not include much help for states, while pointing out that it would cost the states millions of dollars in revenue.

The Democrat’s economic stimulus package does include $31 billion in federal aid to states, in addition to a tax rebate for individuals and couples, business tax relief for new equipment purchases and an unemployment insurance extension. This plan helps working families, the unemployed and the needy—those who are suffering most from the state budget crunch.