WASHINGTON, Oct. 17 (UPI) -- Budget cuts, the traditional government response to the kind of budget shortfalls now occurring in 43 states, place low-income beneficiaries of social services at risk and delay economic recovery, according to analysts at a recent think tank forum in Washington, D.C.
"State revenues are very sensitive to the growth of the economy," Alice M. Rivlin, a senior fellow in economic studies at the Brookings Institution, said at the Oct. 15 event. "The general and corporate taxes fall sharply when the economy slows or turns down."
A good example of this state response is Virginia Governor Mark R. Warner's order Tuesday for $858 million in emergency spending cuts to offset the state's expected budget shortfall of $2 billion over the next two years.
Warner said the cuts were needed because revenue growth has fallen to its lowest point in 40 years of state record keeping.
State support for community mental health, mental retardation and substance abuse services will be reduced by 10 percent in Virginia. Warner's plan also calls for cuts in funding for state colleges and universities and for 140 programs, including workforce training and health education centers, along with 1,837 state government layoffs.
Although states, like the federal government, were using their record budget surpluses just a few years ago to increase spending on social services and other programs, almost every state is now facing immense budget deficits, said Donald J. Boyd, director of fiscal studies at the Rockefeller Institute. Boyd said that the current fiscal crisis is rooted in the bursting of the 1990s economic bubble, and is exacerbated by the cyclical economic downturn.
He said that favorable 1990s trends such as higher-than-forecasted economic growth, increases of 27 percent in average annual capital gains taxes from 1994 through 2000, and soaring consumer consumption, have now stalled or even reversed.
In addition, growth in Medicaid came to a halt during the boom as welfare caseloads fell. This freed up even more money for spending because Medicaid represents a significant portion of state budgets.
"All in all states raised spending, cut taxes and boosted reserve funds in the late 1990s," said Boyd, noting that this is typical of boom periods.
But in the last two years revenues from both income and sales taxes have fallen significantly while expenditures for welfare programs like Medicaid have grown, said both analysts.
Boyd cited data from the U.S. Census Bureau and the Rockefeller Institute showing the growth of state sales tax revenues decreasing to 0.4 percent in 2002, from an average high of 5.7 percent from 1995 through 2000.
Overall state tax revenues in the second quarter of this year declined by 11.8 percent from 2001, he said.
At the same time, Boyd said that state Medicaid spending accelerated by 10.9 percent in 2001, and he estimated that it would rise by 13 percent this year, exceeding budgets for the program in 36 states. He pegged the increase to rising prescription drug costs and increases in enrollment and in the costs of long-term care.
Boyd and Rivlin said that in response to the budget deficits, 42 states have drawn down their reserve funds, and that at least 23 states have tapped into special funds in order to offset budgetary shortfalls. More than 16 states have also used tobacco settlement money accomplish this goal, he said.
But such funds are limited and inadequate to meet increased deficit demands. Some states have already chosen to increase so-called "sin taxes" on products such as cigarettes or have instituted broad-based tax increases, but this is not yet the norm.
Rivlin argued that the spending cuts that typically follow economic downturns fall heavily on lower-income people, and are now coming at a time when jobs are scarce and poverty is on the rise. Many of the state welfare-to-work programs were built up during the recent economic boom with increases in child care, job training, and social service personnel, but these programs have started to be reduced in many states.
According to Rivlin, part of the reason such programs are cut in times of fiscal crisis is that they are such a large part of state budgets, and the poor who benefit from them typically do not have strong representation in government.
She said that such moves by states to balance their budgets are actually counterproductive, because they weaken the economy by delaying economic recovery, and offset the economic stimulus produced by federal budget and monetary policy.
Rivlin said that by raising taxes, delaying planned tax deductions and cutting spending, states further destabilize the economy. Tax increases, for instance, are often blamed for lowering individual and corporate spending that can help spur an economic recovery.
"It doesn't make a whole lot of sense to have your revenue financed by a system that automatically does the worst thing in a recession and puts a lot of the burden on people that are already feeling the pain," said Rivlin.
She argued that the federal government should provide immediate fiscal relief to the states by providing budgetary funding support or by temporarily increasing federal matching funds for Medicaid programs. In addition, she said that the federal government should look at establishing counter-cyclical revenue sharing plans that would be tied to increases in unemployment or other indicators of a weakening economy that work to undermine state budgets.
"I don't think we can get ourselves together to pass something like that now, but we ought to do something before the next recession hits." She said.
She added that states could also adopt more stringent requirements for so-called "rainy day" reserve funds, requiring them to save more when the economy is good, to help offset revenue decreases when the economy slows.
To help those likely to be hit hardest by state cutbacks, Angela Z. Monson, Oklahoma state senator and president of the National Conference of State Legislatures, said that the Congress needs to reauthorize for at least three years the existing welfare-to-work laws that are set to expire at the end of this month, so that state legislatures can make plans beyond the next fiscal year.
"States must know what is coming," said Monson. "The federal government must realize that many of the actions they take, like the tax rebate and changes in their tax schedule, have direct implications for state budgets."
According to Boyd, the current trend in many states to spend rainy day or special funds to offset the fiscal crisis only postpones the problem, and could exacerbate the situation in the future by leaving little money available if things worsen.
He also predicted big problems in 2003 and 2004, due to the unattractive outlook for the economy and further deterioration in tax collections. In addition, he said that Medicaid spending it likely to continue to increase.
In the mid-term, he said that huge losses in the upper tax brackets mean continued slow economic growth, and that slowed consumer spending and a continued shift to the consumption of lightly taxed services means that state tax revenues are unlikely to rebound soon.
He predicted this would ultimately result in heightened spending pressure for Medicaid programs as well as for K-12 education and higher education, with "several years of hard choices ahead."
Boyd said given the current political situation, he thought it was unlikely that the federal government would step in and provide assistance to help states keep their budgets in the black.
"It is hard for me to see the federal government doing something now," he said.