Cuts in public services don’t eliminate demand—and it is a demand that Iris Lav, deputy director of the Center on Budget and Policy Priorities (CBPP), expects to increase as baby boomers retire.

“I worry that with the low savings rate and decline in [employer-provided] defined-benefit pensions there are going to be a lot of people who need a lot of help from state government,” Lav said at CBPP’s 14th annual state fiscal policy conference, Nov. 13-14 in Bethesda, Md. But “demographics is not necessarily destiny. It depends on what we do about it and when we do it.”

As a union of public employees at every level of government, AFT members have a vested interest in public policy decisions, including tax policy.

After all, the outcomes affect your life both on the job and off. Policy decisions determine the resources available to do your job and to pay your salary and benefits. Policy decisions also affect the quality and types of public services available to support your community.

It takes money to run government, though; and despite healthy growth in state revenues over the past year, experts say state and local governments are going to be hard-pressed in 2007 to meet public need for services.

The problem is largely two-fold: regressive tax systems that don’t provide a steady stream of revenue and the federal budget deficit. These issues were the focus of the CBPP conference, which attracted nearly 300 participants, including more than a dozen members of the AFT Public Employees budget crisis task force who represent AFT Public Employees locals across the country.

The resounding message from two days of workshops and plenary sessions was that progressive tax reform must be a public policy priority if the nation’s public services needs are going to be met tomorrow.

“Survival,” Lav said, “equals a strong tax system.”

Regressive, proportional and progressive taxes
From 1994 to 2003, state tax systems became more regressive, said Noah Berger, executive director of the Massachusetts Budget and Policy Center (www.massbudget.org), who attributed the backslide to sales and excise tax increases legislatures enacted to fill budget gaps starting in 2001.

“From a fairness perspective, there are three broad types of taxes,” according to the Institute on Taxation and Economic Policy (www.itepnet.org). “A regressive tax makes middle- and low-income families pay a larger share of their incomes in taxes than the rich. A proportional tax takes the same percentage of income from everyone. A progressive tax makes the wealthy pay more of their income in taxes than those with lower incomes.”

Regressive taxes include, for example, property, sales and excise taxes, because lower-income individuals use a higher share of their income to pay these taxes. A proportional tax would be a flat-rate income tax. And a progressive tax would be a graduated personal income tax structure, including a “millionaire’s tax” like those enacted in California and New Jersey.

States with the most regressive tax systems include Arizona, Illinois, Pennsylvania and Washington, said Matt Gardner, director of state tax policy at ITEP. The cause: Arizona relies heavily on sales and excise taxes for revenue; Illinois has a flat income tax rate; Pennsylvania has a flat income tax rate combined with a heavy reliance on sales and excise taxes; and Washington has a narrowly based income tax combined with a heavy reliance on sales and excise taxes.

Other states where AFT Public Employees members live with flat or effectively flat income tax rates—because the top bracket is so low that most taxpayers fall into it—include Colorado, Indiana and Maryland.

Overall, most state tax systems take a greater share of income from middle- and low-income families than from wealthy families, Gardner said.

Nationwide, the lowest-income families pay nearly 11 percent of total income in income, property, and sales and excise taxes, Gardner said, compared with the wealthiest 1 percent of families, who pay less than 8 percent of total income in income, property, and sales and excise taxes.

“The more you earn, the less you pay as a share of income,” Gardner said. “For most people, this is not what fairness means.”

The revenue pie: Where does the money come from?
More than half of state and local revenues comes from taxes and licensing fees; one-quarter comes from a variety of sources including university tuition, sewerage fees, state and county hospital charges, and net lottery proceeds; and one-quarter comes from federal aid—but that amount is on the decline.

Under the Bush administration, Congress has been a willing accomplice to cutting federal aid to states; and, as a result, states are left with difficult choices: cut services, make up the federal funding shortfall or raise taxes.

The combined federal-state fiscal outlook is precarious moving forward between the federal budget deficit and state tax system structures that fail to generate adequate revenue.

According to the CBPP, 24 states face budget deficits for fiscal year 2007 and beyond, including Connecticut, Illinois, Maine, Maryland, New York, Ohio and Wisconsin.

The reasons vary, ranging from use of one-time funding sources or surpluses to fund ongoing tax cuts or expenditure increases, to already-enacted tax cuts that are being phased in over a number of years, to underfunding state pension obligations as a way to balance operating budgets.