WASHINGTON — Facing the bleakest financial conditions in more than a decade, state budget officials voiced alarm about the prospect of future fiscal woes after President Bush offered his economic stimulus package.
Analysts were studying the president’s proposal late Tuesday, but the emerging response to the plan was alarming. Some experts said the elimination of the tax on stock dividends could cost deficit-troubled states an additional $4 billion. The expected move to the stock market by investors will make it more expensive for states and local governments to borrow money on the bond market, they said.
The uncertainty over tax policy as Congress and the White House fight over the measure will make preparations for budgets difficult because states will not know what they can expect in revenue as they plan for the next budget year.
“We are walking into our legislative sessions with no certainty of funding for shared responsibilities, such as homeland security costs, election reform and children’s health insurance money,” said Michael Bird, federal affairs counsel for the National Association of State Legislatures.
“There is the potential for state financial conditions to be further exacerbated,” he said.
Changes in tax policy almost always have trickle-down effects for the states, which individually must deal with projected budget deficits that range from less than $100 million to, in the case of California, $34.8 billion. The National Governors Association recently characterized the states’ overall financial condition as the most dire since World War II. Except for Vermont, all states have laws requiring a balanced budget.
The stumbling economy and the fall of the stock market have hit state budgets hard: first with a drop in income tax revenue as joblessness increased and tax revenue from capital gains plummeted, and second with a decline in retail sales. Income taxes and sales taxes comprise about two-thirds of the revenue states collect every year.
Even after raising minor taxes and cutting many services to balance budgets last year, more than half of the states face budget shortfalls in the current cycle. The deficit in Illinois is forecast to be about $1 billion for the current year, and $3 billion for the budget year beginning in July.
The efforts by state legislatures scrambling to balance their budgets are likely to include cuts in payments to local governments, reductions in health-care services, additional college tuition increases and new tax hikes.
Among state and local officials, there is mounting anger toward the federal government as it has piled additional security requirements onto them without providing the funding. At the same time, state officials have complained that Washington has not provided money for new federal mandates, nor has it offered financial assistance to meet the states’ mushrooming health-care costs, primarily Medicaid.
The tax changes proposed by Bush, if approved, will add to the financial pressure, they said.