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Deficits as Far as the States Can See

A Commentary By Froma Harrop

Tuesday, January 25, 2011

Like me, you may be wondering why 96,000 California state workers were given cell phones courtesy of the taxpayers. For, like me, you probably use a cell phone in the course of your work. And we know that if we asked our employers to pay for it, the answer would be N-O. 

But here is the financially busted Golden State looking for dimes under the cushions, while nearly 40 percent of its public workers can call their cousins in Cleveland for free. One parks department worker was found to have made 3,300 personal calls in just over a year, the Los Angeles Times reported. None were made during working hours, we are sure.  

Facing budget Armageddon, California Gov. Jerry Brown had found an easy and crowd-pleasing target for savings. He proclaimed that half of the state-issued cell phones would have to go.  

Good move for taxpayer morale, but the savings will come to only $20 million. That means Brown would have to find 1,250 more similar-sized spending cuts to close California's $25 billion deficit hole.  

Most states are broke, even Texas. Anti-tax, anti-labor and pro-business Texas was supposed to be the conservative beacon of fiscal smarts to others. Turns out the magic-hat trick of low taxes doesn't always pan out. The Lone Star State's budget shortfall could reach $27 billion.  

That approximates the sad number now burdening high-tax, highly regulated and much unionized California, and Texas has only two-thirds as many people. The problem in Texas is that sales taxes account for 60 percent of revenues, and they dropped sharply in the recession. Having no income tax, Texas fell into budget havoc when consumers stopped spending.  

But Texas also has a structural deficit -- that is, a deficit unrelated to economic conditions. Texas lawmakers cut property taxes in 2006 and created a business tax to cover the lost revenues. It was apparently not big enough.  

Every unhappy budget forecast is unhappy in its own way -- but Washington adds to everyone's sorrow. In fiscal 2010, over a quarter of all state and local spending came from federal grants, much of it from the federal stimulus package. The stimulus money is tapering off to a trickle. And the federal government now wants to charge states interest on the money they borrowed to pay unemployment benefits.  

Meanwhile, pressure to lower budget deficits in Washington may bring a pullback in federal grants to states for Medicaid, for education, for roads. To raise more tax revenues, Washington may also decide to go after the tax deduction for state property, income and sales taxes, according to Governing magazine.  

Property taxes are already under pressure, as collapsing home prices lower assessments. This trend hurts most in the formerly hot real estate markets of Arizona, Florida and Nevada. These states must also deal with many unemployed construction workers and a drop in sales taxes as a fall-off in new housing units curbs demand for new refrigerators, sofas and wallpaper.  

At the top of the misery scale sits Illinois, which is nobody's beacon for managing state finances. Illinois has it all -- extravagant public-employee benefits, a high home foreclosure rate and $8 billion in unpaid bills. It made headlines recently by temporarily raising the state's income-tax rate by 67 percent.  

We hear talk in Washington of a plan to help states declare a kind of bankruptcy, which would let them restructure their obligations, including to public workers' pensions. There may be little alternative.  

At the same time, good public services do run on money. The time will come when they turn so shabby that taxes will have to rise. In some low-tax states, that clock chimed long ago.  

COPYRIGHT 2011 THE PROVIDENCE JOURNAL CO.

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