Governors Fear Federal Tax Cuts, Or Maybe Not

The nation’s governors appear to be sending mixed messages to congressional leaders as they weigh various proposals to stimulate the economy, including more tax cuts.

In a letter sent to Senate leadership Thursday (10/25), the National Governors Association warns that the stimulus package passed by the House last week (10/24) would seriously exacerbate the states’ already poor fiscal position. The chief culprit is the business tax cut portion of the package, which would force corresponding tax cuts in nearly every state, costing the states at least $5 billion.

But in another statement released the next day, Michigan Gov. John Engler, chairman of the NGA, urges Congress to cut taxes to promote economic growth.

So what do the governors want? Tax cuts or no tax cuts?

“It is a balancing act,” said Susan Shafer, Gov. Engler’s communications director. “We can appreciate the need for economic stimulus, but we also need to be cognizant of the costs and what they mean.”

And what does Gov. Engler think of the House stimulus package that the NGA estimates would cost the states $5 billion?

“Our department of treasury has looked at it and we will continue to look at it,” said Shafer.

In the letter to Senate leadership, Gov. Engler and Kentucky Gov. Paul Patton, the NGA’s vice chariman, say the House package would “dramatically increase existing state shortfalls and result in significant state budget cuts.”

They say the states are already looking at a cumulative deficit of $10 billion and that new state responsibilities for homeland security are exacerbating the states’ serious fiscal conditions.

And they say the package passed by the House would add at least $5 billion to the states’ fiscal woes.

But in another NGA statement released the next day, a slightly different note is sounded.

“We will balance our budgets,” Gov. Engler says in the statement. “But just as important, Washington must agree on a stimulus package that protects funding for human services, provides employment and training for workers who have lost their jobs and promotes economic growth through tax relief.”

Here, the governor, on behalf of the NGA, seems to be endorsing the very tax relief he warns elsewhere will drain billions of dollars from state coffers.

So what is NGA’s position on the House-passed business tax cuts?

“The governors reached no consensus that they would oppose them and they reached no consensus that they would favor them,” said Frank Shafroth, NGA’s expert on state and federal relations.

He said, however, that there is no inconsistency in the NGA’s statements, because the governors do favor some kinds of tax cuts, in particular those that focus on low- and middle-income wage earners.

In addition, said Shafroth, the governors are united in their call to Congress to protect funding for programs that target the poor and unemployed and stimulate the economy through road building and other infrastructure investment.