States and D.C. may be working at cross-purposes
President-elect Barack Obama wants to jump-start the economy by spending billions on big public works projects and tax cuts, but to the alarm of economists, the nation’s governors are working off a different playbook altogether.
States are trying to balance their budgets by raising taxes, chopping programs and cutting spending in 2009. Some economists and lawmakers worry those steps could undercut Obama’s efforts to stimulate the economy.
“That directly counters the expansive action that the feds are trying to engage in to keep the economy moving,” said House Appropriations Committee chairman Rep. David Obey, D-Wis.
Most state constitutions require balanced budgets, and states can’t print money, so governors have only two choices when tax revenue drops off — raise taxes or cut spending. States are preparing to do both, at a time when many people need the social safety net more than ever.
In a column late last month, New York Times columnist and Nobel Prize-winning economist Paul Krugman likened the nation’s governors to President Herbert Hoover, who may have worsened the Great Depression by trying to balance the budget.
“The priority right now is to fight off the attack of the 50 Herbert Hoovers, and make sure that the fiscal problems of the states don’t make the economic crisis even worse,” Krugman said.
At least 44 states have shortfalls or will soon face them: midyear shortfalls total $42 billion, and those gaps are expected to balloon, the Center on Budget and Policy Priorities reported. States spent $966 billion in fiscal 2006, compared with $2.5 trillion in federal spending, according to the Nelson A. Rockefeller Institute of Government.
In New York, Gov. David Paterson has proposed higher taxes on cable TV, cigars, sugary drinks — even an “iPod tax” on downloads of music. Meanwhile, the state agency that runs New York City’s bus and subway system is considering raising fares from $2 to $3. In Ohio, a task force recommended a gasoline tax increase. California Gov. Arnold Schwarzenegger proposed a “nickel-a-drink” tax for drug abuse programs. Cigarette tax increases have been floated even in tobacco states such as Kentucky and Virginia.
Virginia’s public colleges and universities might have to raise tuition to make up for expected budget cuts. Rhode Island Gov. Don Carcieri proposed increasing the reinstatement fee for driver’s licenses from $75 to $250.
Across the nation, at least 20 states are either cutting or proposing cuts to public schools, according to the Center on Budget and Policy Priorities. In New Jersey, Gov. Jon S. Corzine this month proposed steep cuts to schools and municipalities on top of $600 million in cutbacks last year. Schwarzenegger wants cuts to the state’s welfare-to-work program to stave off what he described as “financial Armageddon.”
“They have no choice,” said Sen. Charles Schumer, D-N.Y. “But it hurts the economy.”
Russ Sobel, professor of economics at West Virginia University, said state tax increases would hinder the recovery. Think of the smoker paying $1 more a pack — that’s money that smoker won’t have to spend on other products, he said.
The risk of undermining the federal government’s stimulus efforts could strengthen the case for a Washington bailout of the states.
Five big-state Democratic governors, including Paterson and Corzine, have already asked the government for $1 trillion for all 50 states that would include $250 billion for education and $150 billion in middle-class tax cuts.
State officials are trapped to a large degree. Scott Pattison, executive director of the National Association of State Budget Officers, said governors have few stimulus options because their state constitutions restrict how much they borrow and spend.
Iris J. Lav, deputy director of the Center on Budget and Policy Priorities, said governors would be wise to hold off making any draconian acts until they see what Congress and the Obama administration come up with.