States were taking virtually any step to avoid constitutionally forbidden red-ink spending.
Across the country, some bad decisions were made.
States Forced Into Desperate Decisions
Sporting "Tennessee Tax Revolt" T-shirts, anti-tax demonstrators successfully blocked passage of the income tax that a Republican governor, Don Sundquist, had proclaimed essential. That left a yawning deficit, forcing closure of most state services.
Three days later the Tennessee Legislature punted, avoiding the income tax for one more year by pushing the sales tax up from 6 percent to 7 percent. Lost in the shuffle was an opportunity to terminate the sales tax on food and clothing -- an especially painful burden for poor Tennesseans.
Wisconsin will be losing years of potentially constructive use of the tobacco funds -- maybe even thousands of saved lives.
A better argument can be made for the flurry of cigarette tax boosts just enacted to avoid major tax hikes. The tax on every pack will now be $1.50 in New York and New Jersey (the nation's highest); Washington, $1.42; Michigan, $1.25; Pennsylvania, 69 cents; Connecticut, 61 cents; and Vermont, 49 cents.
Higher cigarette levies at least deter teen-agers from what could be a lifetime of dependence and possibly early death.
But state after state this year cut heavily into reserves -- "rainy day funds" -- And that could be dangerous. Experts warn that even rainier days may be ahead in this decade.
The Flood is Over
State budgets enjoyed a field day through the roaring mid- and late-1990s -- but only through very special circumstances, says Donald J. Boyd of the Nelson A. Rockefeller Institute of Government at Albany, N.Y.
The national economy grew faster than anyone expected, largely because worker productivity was growing rapidly. That translated into a hot stock market -- big jumps in investor numbers and historic rises in capital gains.
Result: state income tax yields soared to historic highs. Simultaneously, Americans were in a pro-spending, anti-savings mood that drove up sales tax yields.
With torrents of cash flowing in, the states were able to cut taxes for seven straight years (1995 through 2001) -- even while increasing their overall spending sharply (39 states by 25 percent or more).
But by mid-2001, we were into a recession, even before the blow of Sept. 11 further deflated the economy. By winter, states found their fiscal roofs were collapsing. State tax revenue dropped 8 percent from comparable months of 2001. Personal income tax payments plummeted 26 percent.
Facing the tide of red ink, many states began chopping at their regular aid packages for cities and counties. Already $2 billion overextended by such post-Sept. 11 outlays as police and firefighter overtime, local governments were obliged to freeze new hires, tap reserve funds and raise taxes and fees.
Atlanta found itself facing an $82 million deficit; Detroit, $94 million; Chicago, $80 million. New York's fiscal 2003 budget has a gaping $6-billion hole.
Recovery is Long Time Coming
Even with political will, states and localities now face tough recovery problems likely to last through much of this decade. Medicaid spending, resuming the inflationary impact it had in the early '90s, is projected to rise 9 percent a year through this decade, driven up in part by rising prescription costs.
Then there's transportation -- roads, bridges and growing demand for new rail systems. Schools are bound to cost more, not just to meet tough new test standards but to recruit the hundreds of thousands of new teachers that will be required by an upcoming wave of teacher retirements and rising school enrollments.
On the states' revenue side, few people expect the stock market to revive and produce anything like the big taxable capital gains of the late '90s. Corporate taxes won't help much either: even before the recession, they'd been driven way down by loophole-searching company accountants and business lobbyists pressuring legislatures for concessions.
Sales taxes may pick up some with the end of the recession. But their long-term future is clouded because they tend to focus on goods and exempt services, the most vibrant sector of the economy. Yet suggest expanding sales taxes to services and every special interest from lawyers to accountants to hairdressers storms the state legislatures, demanding the exemptions continue.
"State finances will be constrained quite tightly over the next several years even if the economy recovers nicely from the current recession," Boyd warns.
Translation: More deficit D-Days and tough choices to come.
