By Edward Lee Pitts, Alisa Harris, Megan Basham, William McCleery
May 7, 2010
World Magazine (an excerpt)

It’s no secret that the federal government is running up an enormous debt, but many state governments are not doing much better. The recession, by reducing the revenues flowing into state capitals, has been part of the problem, as have powerful lobbies that fiercely protect their pet programs.

Nearly every state has had big budget shortfalls, and they’re dealing with them in different ways. In some cases, even culturally similar neighbors are taking sharply divergent paths. Four WORLD reporters took a look at state budgetary politics in four different parts of the country. Here’s what they found.

Virginia & Maryland: Tightened belt vs. “death spiral”

It is a well-worn phrase, but elections really do have consequences. And for Virginians, last November’s results likely lightened their tax load.

Before Virginia’s outgoing Democratic Governor Tim Kaine left office earlier this year, he submitted a budget proposal that included $2 billion in tax hikes to combat the state’s $4 billion shortfall.

But Kaine’s successor, Republican Robert McDonnell, proposed a different solution: $4 billion in spending cuts and zero tax increases.

Unions balked at the reductions, claiming that 37,000 government jobs would be lost. But conservatives, like Michael Thompson with the state’s Thomas Jefferson Institute for Public Policy, told me that making up the state’s revenue gap with a tax increase would force greater job losses on a sector more crucial to a state’s long-term economic health-private businesses.

In the end, McDonnell’s plan prevailed, even in a Democratic-controlled state Senate: Virginia tightened its fiscal belt. It will eliminate travel expenditures, reduce administrative expenses, and consolidate agencies.

It is one of the largest spending reductions in state history. Few programs were spared-$646 million in education cuts combined with a new law making it easier to establish charter schools. But the state is trying to do what its citizens have been forced to do during this recession-live within its means.

After tax collections fell two years in a row for the first time since the 1930s, McDonnell put off his own campaign promises to boost dollars for classrooms, to create 100,000 more degrees at state colleges, and to improve the state’s roads. “When you are in a hole, the first thing you do is stop digging,” explained Jonathan Williams with the right-leaning American Legislative Exchange Council (ALEC).

The rolling of state spending back to 2006 levels begins what state conservatives hope is a four-year experiment on limiting government’s size and scope to core priorities. The mindset, epidemic among state governments, that when there is money on the table you have to spend it or lose it next year, must end.

“If there is a silver lining with this recession, it is giving government a chance to take a look and ask if we really need to do this?” Thompson said.

This marks a change from 2004 when then Gov. Mark Warner introduced the largest tax increase in state history. Then a GOP-controlled House of Delegates lacked the will to stop the hike. But this time the backs of lawmakers were stiffened by what Ben Marchi with the Virginia chapter of Americans for Prosperity called a “perfect storm”: A worsening fiscal crisis combined with the recent growth of the federal government has fueled unprecedented grassroots activism.

Last week McDonnell signaled that he is not done. He proposed 96 amendments that cut $51 million more to the two-year $82 billion budget. These cuts ranged from the controversial (an additional $10 million cut to services for at-risk youth programs already facing a $86 million hit) and the obvious (elimination of dollars that allowed state employees to get erectile dysfunction drugs using their state health plans). Alas, the amendments included $42.1 million in new spending. Old habits die hard in the nation’s state capitals.

When the 2010 edition of the Maryland General Assembly ended with its traditional midnight confetti drop during the first seconds of April 13, multi-colored balloons rained down onto weary lawmakers. But the 90-day session concluded with lawmakers failing to puncture one balloon that just keeps growing: the state’s annual budget shortfall.

Nine of its 10 congressional representatives are Democrats, and Maryland’s proximity to Washington means it continues to feed from the federal trough rather than make tough choices: The state’s just approved $32 billion budget for the next fiscal year props up a $2 billion gap with federal stimulus money while cutting just $120 million in spending.

Democratic Governor Martin O’Malley proposed a bevy of one-time fund transfers ($300 million in highway user fees to the general fund) and borrowing that amounted to little more than accounting gimmicks. These short-term fixes have many worried that future sessions will have to deal with even bigger annual shortfalls. The lack of political will in Annapolis leaves the state facing near-record shortfall projections of $2 billion or more per year through 2015. It means tax hikes could be around the corner, especially if the state stays in Democratic hands after this November’s gubernatorial election.

“We are in a death spiral,” state Sen. E.J. Pipkin, a Republican from the state’s Eastern Shore, warned his colleagues in the session’s final days. Only two Republicans voted for the budget.
Former Republican Gov. Robert Ehrlich, who is trying to regain his post this fall, accused the lawmakers of “kicking the can down the proverbial alley . . . waiting for the monumental tax increases everyone knows is coming.”
This state budget seems designed to get Democrats through to the next election without raising taxes. O’Malley held back his tax increase urges: In 2007, his first year in office, he raised taxes, including boosting the sales tax from 5 percent to 6 percent.  But three years later the budget problems remain.

Why? Unintended consequences often follow tax increases. When Maryland raised its top tax rate to 6.25 percent, the state lost $1 billion of its net tax base in 2008 due to migration. “You don’t enact tax increases inside of a vacuum,” said ALEC’s Williams, also an author of Rich States, Poor States.

This time around, state legislators relied on a heavy dose of budget bailouts from Uncle Sam. Federal stimulus dollars account for almost $1.3 billion, or more than 8 percent, of the budget. Rather than stimulate, Maryland is using federal taxpayers’ dollars to fund normal expenses. So when Washington’s welfare for states disappears next year, Maryland will be facing a fall.

“Maryland has not been reining in spending at all,” Gabriel Michael with the Maryland Public Policy Institute told me. “This is an extra billion dollars we will have to come up with. There will be a scramble to come up with the money.” –

Edward Lee Pitts

Please follow and like us: