Revenue issues loom in spite of cuts

On the heels of his re-election to a third term, Connecticut Gov. John Rowland gave state employees a choice: agree to contract concessions totaling $450 million or risk the threat of being laid off.

The ultimatum was Rowland's response to the state's $650 million budget shortfall, which is expected to grow by an additional $1.5 billion in the new fiscal year, which begins July 1.

His hard-line, singular approach to the deficit outraged the 13 unions that represent state employees and the services they provide. Employees are willing to compromise, but that is not enough for Rowland, says Marilyn Kaika, treasurer of Connecticut's Administrative and Residual Employees Union (A&R), an affiliate of AFT Public Employees. "He wants to roll back our wages," says Kaika.

The unions offered concessions as well as suggestions about how the state could save money, jobs and services. One offer was a four-year $990 million savings plan that included wage deferrals, payroll cuts (by encouraging employees to leave state service or work a reduced number of hours), and  health insurance and pension savings.

Corporate tax reform was among the suggestions offered by affiliates of AFT Public Employees. "We have 39 major corporations that pay zero taxes, and that is because of the governor's program," says Leo Canty, president of the Connecticut Federation of Educational and Professional Employees/AFT, which is the state federation for all AFT affiliates in Connecticut.

Rejecting the unions' offers and suggestions, Rowland issued 2,800 layoff notices in early December--and threatened even more job cuts. Union observers believe that Rowland's threat of concessions or layoffs, combined with his unwillingness to mediate, was a strategy to divide and conquer. But that is far from how this scene in Connecticut politics is being played out.

In November, several hundred employees attended one of the first of many rallies the coalition of unions would hold. An early January rally drew more than 2,000 workers.

Kaika says 83 percent of the respondents to an A&R membership survey said they would accept the unions' money-saving proposals or they did not want any concessions at all. Seventeen percent, she says, wanted to accept the governor's proposal.

"Certainly the people who are out the door would accept anything because they are forced into that state of mind," says Kaika. But to her, the question becomes, "What happens when you come back to that job and you are making half your pay and the resentment sets in?"

"Some form of concession is not out of the question," says Canty. "But we are not going to offer concessions one month and then [have the administration] come back again and again" asking for more.
 

Economic realities

The budget deficits in state government are the worst since World War II. The White House explains away the crisis, pointing to the war on terrorism, both at home and abroad, as well as declining consumer confidence in a stock market that was ravaged by the consumer slowdown following the terrorist attacks and corporate scandals. Nowhere does the Bush administration entertain culpability for federal and state economic woes brought on by the president's $1.35 trillion tax cut. And many incumbent governors won't admit publicly that their own tax-cutting sprees through the heydays of the 1990s, combined with the current economic slowdown and the federal tax cut, created ripe conditions for this budget tidal wave.

Experts on state economies, however, have a different perspective. Before the war on terrorism and before the stock market free fall, economic experts warned that state revenue collections were declining--and would further decline under the Bush administration's 2001 tax cut. They also warned that spending would rise due to the exploding cost of healthcare.

According to the National Governors Association, in fiscal 2002, sales tax collections were 3.2 percent lower than originally budgeted, personal income tax collections missed states' targets by 12.8 percent and corporate income taxes were 21.5 percent lower than projected.

Cheryl Parker Rose, director of policy and compliance for the Democratic Governors' Association, says governors are having to choose priorities--and they will continue to reprioritize. "In instances where they don't have direct authority, expect cuts," she warns.
 

Your union's strategy

"We are in the eye of the storm," says Ed Muir, AFT assistant director of research, who is working with the AFT Public Employees Budget Crisis Task Force to develop a comprehensive, practical response to the revenue shortfalls.

The task force's major recommendation is to make the discussion be about revenue, not about cuts. Muir says the task force is urging affiliates to ask lawmakers, before they make cuts: "Have you done everything you can to be sure the revenue system is performing as well as possible?"

"Sometimes you look for uncollected taxes. Or sources of money a state has but hasn't considered before. Or you close loopholes. Or readjust the tax system because the feds have come in and undermined the tax base," Muir says.

As part of the ongoing work of the task force, the AFT research department has developed deficit-reduction proposals for Connecticut, Illinois, Maryland and Washington state. Similar proposals are being written for Colorado, Indiana, Kansas, Minnesota, Montana, North Dakota and Ohio. The proposals, tailored to each state,  address such issues as estate, business and sales taxes, as well as prescription drug costs (see sidebar, "Closing the gap").

Given the magnitude of the deficit problems, "We won't get through this without tax increases," Muir says.
 

Debate over tax fairness

One Washington, D.C.-based think tank has been watching--and warning--about the unfolding crisis. "At a time when cuts in federal aid and declining state revenues are forcing state lawmakers to seek higher taxes, it's important to evaluate who currently pays state and local taxes," says Robert McIntyre, director of the Institute on Taxation and Economic Policy (ITEP). "Unfortunately, when it comes to paying for services, most states currently have extremely unfair tax systems."

According to Who Pays? A Distributional Analysis of the Tax Systems in all 50 States released by ITEP in early January, "While the primary concern of lawmakers in the 2003 legislative sessions is likely to be tax adequacy (ensuring that sufficient revenue is available to fund important services), it is equally important to assess the fairness of state tax systems--both currently and as they have changed over time."

The study, which examines all forms of state and local taxes, found that:

• Nationwide, middle-income families pay almost 10 percent of their earnings in state and local taxes, and poor families pay more than 11 percent. But the richest people effectively pay only 5.2 percent of their income in state and local taxes.

•  Since 1989, state and local taxes have risen for low- and middle-income taxpayers, but have decreased for the wealthiest.
   

Taking action

With revenue the focal point of the Budget Crisis Task Force, tax fairness is a recurring theme among affiliates in states that are facing program cuts, furloughs, wage and benefit freezes, and layoffs.

The Connecticut Federation of Educational and professional Employees presented its budget-deficit reduction plan to lawmakers in November, and Gov. Rowland (an anti-tax activist) has told the media he now will consider raising taxes. Among the taxes he is considering is a surcharge on millionaires, which he vetoed last year.

In Colorado, where the state budget deficit for the current year is an estimated $850 million, the Colorado Federation of Public Employees (CFPE) is admittedly facing an uphill battle between Gov. Bill Owens (a government minimalist) and the Taxpayer Bill of Rights, or TABOR amendment, which outlines strict budget growth and tax policies.

CFPE president Jo Romero explains that under TABOR, "there is no way to reinstate a program that has been cut unless you put in for a tax increase and people approve it."

Nearly 50 CFPE members attended a lunchtime rally at the state Capitol on Jan. 13 to protest program cuts. Romero, who spoke at the rally, says "Fixing the economy is not about politics. It is about people. It is about Colorado families."

Romero challenges Gov. Owens to stand behind his 1999 pledge to veto any bill that would harm a working family. "This budget crisis presents another opportunity for individuals in places of power to stand behind their words," Romero says. "The core values of working families are job security, fair wages, benefits and fair treatment, and a voice at work. These core values are critical elements in creating and sustaining a strong economy."

Meanwhile, in Illinois, where the budget deficit is approaching $5 billion, newly inaugurated Gov. Rod Blagojevich is talking taxes--new taxes on services that previously were not taxed--rather than job and service cuts.

"The governor has promised a new way of doing business and some thinking outside of the box," says David Pippy, president of the Illinois Comptrollers, an affiliate of AFT Public Employees. "Our new governor is not hostile, like the governor of Connecticut, [who] wants to lay the blame on the doorstep of the public employees and make them pay for the budget problems--instead of looking for innovative ways to solve the problems."