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It’s the best fiscal break for state governments since the deep slump that followed the 9/11 terrorist attacks. Most states have just finished up budget years reveling in surpluses that are at least 10 percent ahead of their projections. The National Conference of State Legislatures, totalling up all the state surplus figures, reports a heartening $57 billion figure.
Why all this good news? What’s happened to let a good number of states start making up for years of lagging help for schools and colleges and local governments, even replenish their rainy day funds?
Reason No. 1: a strengthened national economy. No. 2: Several onetime, probably temporary breaks in individual states. Connecticut, for example, is realizing a windfall from capital gains on its income tax. Arizona is reveling in an unexpected $1.5 income bubble generated by its real estate boom.
And there’s another factor: new life in the beleaguered state corporate income tax. In recent years it’s been so cleverly “gamed,” with profits shifted around from state to state by clever company accountants, that some experts predicted its eventual demise. But now tax returns to the states have soared with rising corporate profits. States have begun to pass “add-back” laws to recapture money that corporations try to “shelter” in tax haven states like Delaware.
Another factor in the corporate tax rebound, reports Governing magazine, is that companies decided in the wake of the Enron debacle and parallel corporate scandals to stretch laws less, play it safer. Also, the federal Sarbanes-Oxley Act has required new levels of transparency in corporate fiscal dealings.
But are the happy days in state finances likely to last long? The answer, sadly, is almost surely not.
In the short term, there are indications the economy is slowing, with some discussion among economists whether we’re headed to a recession or just a “soft landing.”
Either way, says David Osborne, author of “The Price of Government” and veteran observer of the scene, we’re in for lean years -- maybe decades of lean years -- for state governments. The basic reason is the aging of our population and the built-in, seemingly irreversible inflation of our health care costs that are now gobbling up about a third of state budgets, up from just 15 percent in 1985.
The federal government is in no position to come to the states’ rescue. It not only has a rising tide of Social Security payments ahead but has to pay for Medicare, destined to gobble up ever greater shares of the federal budget as the “baby boomers” reach retirement years. Add in our escalating budgets for armed forces and weapons, plus the huge interest payments on the massive deficits the current government in Washington has been running up, and there’s little doubt about the future -- a federal government less able to help out states.
As for the states themselves, no one’s found a way to stop the inexorable upward march of Medicaid costs. Education is bound to cost a lot more -- not just because of teacher union power, but because a 21st century economy (and state economic success) makes not just high school, but higher education mandatory for most students.
On top of that, many local governments are highly dependent on state aid -- and hobbled by state restrictions on how much they can raise themselves. State aid was cut sharply starting in 2001, and has a long way to come back.
Add in long-overdue infrastructure repair, disaster preparedness, maintaining highways in an era of weakened federal support, plus the immense sums we spend on incarcerating more people than any other nation on earth, and any idea of easy fiscal times for states anytime soon is probably pure fancy.
And that’s before calculating the figures -- as high as $1 trillion in all -- for unfunded state and local government worker pensions and full funding (which becomes mandatory next year) of retiree health plans.
It would be great if these realities were part of this fall’s elections for governors in 36 states. But they aren’t. Instead, candidates are typically promising new programs and shunning any talk of new taxes.
Some surreal situations have developed. Take Massachusetts. It’s siphoning off $550 million from its “rainy day” fund to balance its current budget -- even while several of the candidates for governor wrangle over how much to cut the state income tax.
Maine, Montana, Nevada and Oregon have stiff tax and revenue limit measures on this fall’s ballots. Similar initiative efforts are pending in six other states. Washington voters will consider repealing the estate tax, which generates about $100 million a year for public schools and enrollment in higher education.
The more the anti-taxers succeed, the sooner the comeuppance in the state capitals. Yet Osborne’s gloomy prognosis is probably correct: all states better gird themselves for “permanent fiscal crisis.”
Comments may be addressed to npeirce@citistates.com
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