The Bush administration’s overall strategy to permanently reduce the role of the federal government is likely to worsen the budget crises for states even if the economy begins to recover, say fiscal policy experts.

A variety of speakers delivered the bad news to public employee unions and other state budget experts gathered in Washington, D.C., in November for a conference on funding state services, which was sponsored by the Center on Budget and Policy Priorities (CBPP).

Despite recent declines in the jobless rate, the much-touted economic rebound will not fill the gaps in state funding, they warned. With federal aid accounting for more than 27 percent of most states’ general funds, the Bush administration’s tax cuts and other cuts to discretionary programs--particularly human services--will shift more responsibility for services and programs to the states. CBPP estimates that policies enacted under the Bush administration will cost states $185 billion between 2002 and 2005.

Bob Greenstein, CBPP founder and executive director, referred to the strategy as "putting new architecture in place to shrink the federal government’s role." Even as the current economic downturn ends, the federal deficit will reach $5 trillion (not including interest) over the coming decade if the U.S. continues its current policy, he said.

Further, if new tax cuts are enacted or if the existing Bush tax cuts set to expire over the next eight years are made permanent, Greenstein added, the federal deficit will stack up even higher.

The deficit’s toll on state budgets will, in turn, put more pressure on state aid to localities, which accounts for more than 35 percent of local general revenues. State revenues to cities were cut by approximately $2.3 billion for fiscal year 2004, a 9.2 percent decrease from 2003, noted CBPP executive director Iris Lav.

Creating a permanent reduction in federal spending is just one part of the Bush administration’s larger agenda, said John Podesta, former chief of staff for President Clinton and current president and chief executive officer of the Center for American Progress, a Washington, D.C.-based nonpartisan research and educational institute.

Other Bush administration priorities include eliminating taxation on investment income beyond capital gains and dividends, and restructuring entitlement programs such as Social Security and Medicare.

The tax-free savings and retirement vehicles that will be part of President Bush’s fiscal 2005 budget proposal will chip away at state and federal tax receipts by providing tax shelters that would predominantly benefit wealthier individuals who have the disposable income to save. Moreover, such programs would "move the tax base to wage workers," Podesta noted. [Barbara McKenna / AFT On Campus]

[February 3, 2004]