States Warned Tax Hikes May be Needed

By: - December 15, 2008 12:00 am

The national recession is so severe that states may have to consider raising taxes along with cutting spending to cover budget gaps, the chief economist of Standard & Poor’s told a conference of state legislators.

“You’re going to have to bite the bullet and accept there are going to have to be significant budget cuts and tax increases as well because I’m not sure you can do it all on the budget side,” said David Wyss of Standard & Poor’s, a financial services company that provides credit ratings to state and local governments.

Speaking Friday (Dec. 12) to about 200 lawmakers at the annual fall forum of the National Conference of State Legislatures, Wyss suggested states first consider hiking gasoline and sales taxes because they penalize consumption. The governors of Idaho, Oregon and South Dakota recently have proposed gasoline tax increases.

Though some states, such as California and Wisconsin, also are weighing tax and fee increases, taking that course is a tough political sell in most states.

“I’m not in favor of taxing our way out of this,” state Rep. Phil Montgomery, a Republican from Wisconsin, said following Wyss’ remarks.

But Wyss said states may have no other choice as the recession drags into next year. Already, 43 states are coping with budget shortfalls as the nation faces rising unemployment and a global credit crisis. If credit markets stay locked up, oil prices fluctuate and home values keep declining, “this could turn into the deepest recession since World War II,” Wyss said.

“It’s going to be a tough, tough couple of years to get through [for states] because revenues are going to be really lousy,” Wyss said.

Many states are looking to Washington, D.C., for help. But discussions at the NCSL conference turned up some concerns over the multi-billion-dollar stimulus package under review by Congress, including some resentment from lawmakers whose states are balancing their budget without a federal bailout. President-elect Barack Obama has said the package should include direct aid to struggling states as well as money for public works projects.

California Assembly Speaker Karen Bass (D), among others, has said a federal bailout is essential to avoid deeper cuts and additional layoffs. Her colleagues will do their part to raise revenue and slash spending, Bass has said, but their actions can’t possibly cover all of California’s projected billion budget gap, tops among the states.

But Utah Senate Majority Leader Curtis Bramble (R) complained that California and other states are “asking for a bailout from their bad spending habits.”

“They’re asking for a loophole to violate ‘living within their means,'” Bramble said. Meanwhile, he added, Utah has cut spending for programs such as Medicaid, the federal-state health care program for the needy, to balance its budget, and more spending cuts are coming. Utah lawmakers say they may need to reduce the budget by 15 percent.

Carl Tubbesing, director of NCSL’s Washington, D.C., office, had a different concern about the stimulus package: its cost. Govs. Jon Corzine (D) of New Jersey, Jim Doyle (D) of Wisconsin and Jim Douglas (R) of Vermont on Dec. 11 asked a U.S House committee for an assistance program of up to trillion for states.

“I think that makes a lot of people nervous,” Tubbesing told lawmakers in Atlanta. Chances are high that a Democratic-led Congress and White House will approve a stimulus package, he said. “The one thing that could trip it up is the dollar amount is getting so high.”

Legislators from states where the automobile industry has a large presence said they worry that if the federal government does not approve a separate rescue plan for General Motors and Chrysler, unemployment will go up and taxpayer-financed health care costs will rise. States operate their own unemployment insurance programs through taxes charged to employers, with federal funds available to ensure continued benefits. The state funds are drying up in many states because of the downturn.

Without a loan to the auto industry, “you’re going to have immediate, radical, destructive impacts on our unemployment situation,” said state Rep. Brent Yonts, a Democrat from Kentucky.

The Bush administration said Dec. 12 it would consider tapping the billion financial rescue fund to aid the auto industry after the U.S. Senate failed to enact a rescue proposal last week.

Signs of the economic crisis couldn’t be avoided as legislators arrived in Georgia for the conference. On Dec. 10, Georgia housing industry officials told a state legislative committee that the Atlanta area is in a housing depression. The same day, Gov. Sonny Perdue (R) proposed a state economic stimulus package that calls for hundreds of millions of dollars in new borrowing for infrastructure projects. And the Atlanta city government announced its fourth round of layoffs.

“For all of my colleagues who say they want limited government, boy, are they going to get it,” Perdue said, drawing laughter at the NCSL meeting. Georgia may have to cut as much as .8 billion from its budget next year.

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Stephen Fehr

Stephen Fehr is a senior officer with Pew’s government performance portfolio. He is a lead writer on many of the products generated by the portfolio, specializing in state and local fiscal health.