Fiscal Policy Split Pits Bush vs. States

On the same day President George W. Bush proposed slashing federal taxes to boost economic growth, Idaho Gov. Dirk Kempthorne unveiled a plan to raise state taxes as a “last resort” to preserve basic services, such as education and healthcare.

Contrast Kempthorne’s tax proposal with Bush’s $674 billion stimulus package and you get a startling look at the starkly different fiscal realities facing federal policy makers, who are considering tax cuts to boost the economy, and state leaders, many of whom are considering tax increases to close budget gaps and keep services intact.

Collectively, states are facing budget deficits that could reach upwards of $65 billion. Forty-nine of the fifty states have balanced-budget requirements, which means they must end their fiscal years with no red ink in their books, leading some governors, even those considered fiscal conservatives, to propose large-scale tax increases.

“I believe in limited government. I believe in lean government. But I also believe in providing for the essential functions of government,” Republican Kempthorne told Idaho lawmakers Tuesday (1/7) in his 2003 State of the State Speech.

Staring at a $200 million hole in Idaho’s budget even after state agencies and programs had been cut to the bone, Kempthorne proposed raising the state sales tax by 1.5 cents and the cigarette tax by 34 cents.

He said the alternative spending cuts alone would require the state to eliminate funding to its seven health districts, close the health department’s extension offices in all 44 counties, end state support of community colleges and state funded scholarships and financial aid, and wipe-out state economic development efforts as well as state funding to the Departments of Agriculture and Labor.

“This would be devastating to Idaho and none of us were elected to eliminate the core services we provide to our citizens,” Kempthorne told state lawmakers.

Kempthorne is not the only governor calling for a significant tax increase.

Arkansas Gov. Mike Huckabee, also a Republican, last month asked his legislature to raise the state sales tax by five-eighths percent to generate $250 million a year. Huckabee said stagnant revenues coupled with the wants and needs of state residents left him little choice.

“People want more money for teachers. They want more money for scholarships. They want more money for roads. They want nursing-home patients cared for . . .They want to go to the doctor and have every diagnostic test the doctor has,” Huckabee said on his radio call-in program, Ask the Governor, on KARN, Little Rock.

Tax-wary legislators put Huckabee’s proposal on the backburner, preferring to look for more places to cut before resorting to tax increases.

In Connecticut, Republican Gov. John Rowland proposed a “Millionaire’s Tax” that would raise the state income tax from 4.5 percent to 5.5 percent for people earning more than $1 million a year. Rowland’s proposal comes just months after he opposed a similar tax plan proposed by Democrats during the last round of budget negotiations.

Rowland is also asking for $200 million in spending cuts and $100 million in state employee union concessions. Connecticut faces a $650 million deficit this fiscal year, which ends June 30, and a deficit estimated at $2 billion the next.

On Thursday (1/9), Ohio Gov. Bob Taft joined the Republican governors’ tax parade, suggesting that Ohio’s budget deficit is so large it will likely require a tax increase. He declined to specify which tax or how much.

Complicating matters for these governors is Bush’s stimulus plan, which analysts say could have an adverse near-term affect on state finances. The proposed tax exemption for dividends, a key component of Bush’s plan, would likely reduce state revenues by an additional $4.5 billion per year, according to the Center on Budget and Policy Priorities (CBPP), a left-leaning Washington, D.C. think tank.

Forty-one states with income taxes as well as New Hampshire and Tennessee, states that tax only interest and dividend income, would take a hit, the center said. Most depend on federal definitions for what constitutes income, so they are directly affected by income tax changes at the federal level.

CBPP said the tax loss would be most severe in California, which would lose $1.1 billion per year, and New York, which would lose $551 million per year. California’s estimated budget shortfall is $34.8 billion over the next 18 months. New York is looking at a $12 billion hole over the same period.

Besides the revenue loss from the proposed elimination of dividend taxes, governors are upset that Bush’s proposal included no direct fiscal relief for states. Early versions of the plan, leaked to the press, were said to include roughly $10 billion for states to make up for the losses they would accrue from the tax changes. But Bush included no such funds, leading to a rebuke from the National Governors Association.

“The nation’s governors regret that the President’s economic stimulus package did not include direct flexible fiscal assistance to the states. In fact, the tax exemption for dividends. . .would exacerbate the current state fiscal problem,” the governors said in a press release.

Thrusting themselves into the debate over how to give the lagging economy a kick in the rear, the nation’s Democrat governors proposed an economic stimulus package Thursday (1/9) that would direct significant federal funds to the states, extend unemployment insurance and increase infrastructure spending.

Their proposal came with estimated total price tag of $157 billion, compared to Bush’s $674 billion plan.

Instead of a dividend tax cut, the Democrats proposed a refundable tax credit on the first $15,000 of a worker’s income, for a total credit of $375 for every worker, even those with no income tax liability. Their plan also inludes $50 billion in direct short-term aid to the states, including an increase in the federal share of Medicaid, a joint state-federal program that provides healthcare to low-income Americans.