State budget woes are a drag. That's the message governors and state legislators are sending to Congress and the President as debate rages over an economic stimulus package.
State officials are concerned that budget-balancing moves at the state level, such as tax increases or budget cuts, would slow economic activity and undercut the federal government's economic stimulus efforts.
"This growing state budget shortfall will continue to be a major drag on economic recovery and will offset a portion of a federal economic stimulus package," Michigan Gov. John Engler and Kentucky Gov. Paul Patton said in a letter to President George W. Bush last month.
Ray Scheppach, executive director of the National Governors Association, said at a press conference Monday (12/10) that state budget deficits will probably offset 50 percent of the federal stimulus effort.
The governors' argument is simple. Tax increases would pull money out of consumers' hands, while budget cuts would result in layoffs, construction delays, education cuts and spending freezes. Either, they say, would dampen economic activity.
The National Governors Association and the National Conference of State Legislatures have been making this argument to Congress and the Administration as terms of an economic stimulus package that could top $100 billion are debated in Washington, DC.
What do state officials want from the federal government? In a word, money.
The governors' number one request is additional Medicaid funding. Because this money flows through the states and is relatively flexible, the governors say it would ease the states' budget crunch while stimulating the economy and shoring up the safety net for low-income families.
Total cost to the federal government would be about $5.5 billion. Senate Democrats have been fighting for the increase, although its ultimate fate remains uncertain.
State legislators have a longer and broader wish list. They are urging Congress to put the brakes on tax cuts that would adversely affect the states, including the bonus depreciation allowance and the Alternative Minimum Tax. The governors have been conspicuously quiet on the tax issue.
Legislators also are seeking a significant increase in homeland security spending and Medicaid spending, as well as grants that states could spend as they see fit.
There's little question that states are in a deep hole that's getting deeper by the day.
At present, forty-three states are taking in less revenue than expected, according to the National Conference of State Legislatures. The total dollar value of the states' deficits is approaching $35 billion, according to the National Association of State Budget Officers.
In response, at least 36 states have implemented or are considering budget cuts or holdbacks.
There is some question, however, as to whether states need the federal government to lend them a helping hand.
Mark McMullen, senior economist at Economy.com, a consulting group, contends that the states are actually in decent fiscal shape, contrary to what many analysts are saying.
"It's easy to make the argument that this time around states are actually positioned to be more stimulatory than usual," he said in an interview with Stateline.org. "The states have nice rainy day funds they didn't have last time around. They can cash in on their huge tobacco settlements."
Iris Lav, a budget analyst at the Center for Budget and Policy Priorities, disagrees.
"A lot of the reserves have already been budgeted to get through the current budget year," she said. "There's a concern that unemployment may persist. States are reluctant to use the majority of their rainy day funds when fiscal problems first appear. They know they may have to stretch them out over a few years."
If past recessions are any indication, Lav said, states can be expected to fill about a third of their budget holes with reserve funds.
The rest will come from tax increases, spending cuts, or if state lawmakers have their way, some help from the federal government.
At present, Congress is debating the particulars of the economic stimulus package. House and Senate representatives are meeting in an informal conference to work out their differences, which remain significant. They hope to have a stimulus package ready by the holiday break.