A $20 billion drop in the bucket

By Ed Muir

States spend about $1 trillion a year to run their governments. This year, states have struggled to close budget gaps totaling about $85 billion. Thanks to the work of AFT members and other unions, Congress got the word to come through with $20 billion to alleviate the budget crisis.

It is making a difference. In Puerto Rico, the governor is able to make good on previously promised raises for AFT members. In Rhode Island, the Legislature could cancel an increase in state employees' pension contribution rates. West Virginia has shored up its workers' compensation system. And Colorado reinstated a prenatal health program. In every state, Medicaid patients in danger of losing those services have been given a reprieve.

The fly in the ointment is that the $20 billion is a one-time fix. The federal tax cuts mean decreased federal funding for state programs. Less noticed, but of more immediate concern, is that the federal tax cuts also have sapped states' abilities to collect their own revenues.

States typically link their tax codes to the federal code, so a change in federal tax rules ripples across state budgets, too. In a recent New York Times article, one Maine legislator noted that about one-fifth of his state's tax shortfall was a result of federal tax changes. Although the overall effect in many states will not be as pronounced, the point is that the federal tax changes are imposing tax cuts on states already struggling to fund services.

For example, the federal estate tax cut simultaneously phased out the vast majority of states' own estate taxes. The potential loss to the states in 2004 is $3 billion--a figure that will rise to $7 billion in 2007.

In addition, changes to federal corporate depreciation schedules in 2001 meant fewer corporate tax dollars for the many states that used the federal schedule for their own corporate tax. The cost in 2004 would have been another $4 billion--but most states took action so they no longer are linked to the federal schedule.

But that's not all. Had President Bush gotten his way with the "dividends tax cut," states using the federal definition of "income" to determine what was taxable would no longer be able to tax dividends either. The net effect on states would have been $7 billion less per year. Dormant now, that change may still come about next year, and proposed changes to IRA rules, Medical Savings Accounts and other tax breaks could add to the total.

One dollar of every $4 spent by states comes from the federal government. A recent report from Citizens for Tax Justice found that, Social Security excluded, $1 of every $3 spent by the federal government in 2003 was borrowed. The tax cuts, by permanently diminishing the federal government's ability to pay for services, are creating higher debt now and a reckoning to come. The rising deficit creates real danger that the federal government will not be able to fulfill its commitments to the states in healthcare, education, transportation or other services--leaving the sole responsibility to the states.

As a result, serious debates over the need for adequate funding for the services provided by AFT members are taking place in state capitols and town halls nationwide. Concerted efforts to provide adequate and fair funding for public services are being made. In some states, Republicans like Gov. Bob Riley of Alabama are helping lead the fight. In others, it's Democrats like Gov. Bill Richardson of New Mexico doing the job.

Some of the federal changes--taken alone--might have been good ideas. However, long-term damage has been done to state finances by this administration's overzealous tax cuts. Against that backdrop, the $20 billion is a drop in the bucket.