Painful Choices for Incoming Crop of State Leaders

Buffeted by huge deficits, higher taxes and service cuts, voters are deeply frustrated with the efforts of state officials to bring budgets in line. Although they would rather endure further spending reductions than see taxes go any higher, they are nevertheless willing to countenance some revenue increases if they can be convinced that the money will be spent efficiently.

Those are some of the conclusions of a new report  from the Public Policy Institute of California and the Pew Center on the States, Stateline ‘s parent organization. The report is based on public opinion polls conducted in June in Arizona, California, Florida, Illinois and New York. The results show remarkable unanimity in public opinion across regions of the country that differ greatly from each other politically and demographically.

The report also reveals that most citizens have only a vague idea of the trade-offs that will be necessary to balance budgets. For instance, a majority of poll respondents wants to maintain funding for K-12 education and for human services. But in most states, those two areas will have to be rolled back significantly to balance budgets unless taxes go up. There is little public awareness that K-12 and human services, including Medicaid, account for more than 40 percent of budgets in all five states.

This is a time of massive transition in state capitals. At least half of the country’s governors will be new next year, and newly elected lawmakers will take their seats in state legislative chambers in the midst of crippling budget difficulties exacerbated by the winding down of the federal stimulus program.

Not by sin alone

Those new legislators will find a public appetite for higher “sin taxes” and corporate taxes. Respondents prefer raising taxes on cigarettes, alcohol and gambling to increases in income or sales taxes, according to the report. Some states have already taken this approach. In 2009, 14 states raised cigarette taxes. This year, at least six have done so. New York raised its cigarette tax by $1.60 to $4.35 a pack, the highest rate in the country.

But sin taxes and corporate taxes bring in only a fraction of the revenue necessary to run state government. Prior to this year’s increase, for example, New York’s cigarette tax accounted for only 2 percent of the state’s $65 billion in total revenues. In Arizona, the corporate income tax represents only 5.3 percent of the state’s total tax revenue. Increasing it, which a majority of respondents would like to do, will not solve the state’s budget problems, as the report points out.

There has been some evidence this year that voters will accept broader forms of tax increase. Arizona voters approved a temporary 1-cent sales tax increase this spring to finance education, health services and public safety. And Oregon voters agreed in January to raise income taxes on high earners and corporations. But tax increases have not solved those states’ woes. Arizona faces a $2.25 billion budget gap this fiscal year and next. In May, Oregon fiscal analysts stunned lawmakers by telling them that the state’s budget gap had widened to $563 million, barely four months after the tax increase vote.

Revolt against borrowing

Respondents in all five states also frowned on continued borrowing to balance budgets. “Borrowing is a very, very common part of the way state and local governments operate because cash flow varies during the year,” says Mark Baldassare, president of the Public Policy Institute of California. “Where borrowing becomes problematic, of course, is when you have a large proportion of your current expenditures being covered by borrowing.”

But many states have been doing just that. Borrowing has spiked in recent years as state governments have turned to creditors to make up for lost tax revenues. State and local government debt hit $2.3 trillion in 2009, twice as much as in 2000.

The report found that voters have lost trust in their state governments. Trust is stuck at 18 percent in California and 19 percent in Illinois and New York. Floridians and Arizonans are less pessimistic about their elected officials, with 31 percent of Florida respondents and 33 percent of Arizona respondents saying they trust their governments.

With deficits on the horizon this year and next, elected officials are going to have to be frank with the public about the choices they face, says Susan K. Urahn, managing director of the Pew Center on the States.

“Folks are willing to do their part in terms of dealing with those fiscal crises,” she says. “There’s an opportunity to really crystallize the public debate to make it clear to the public that there are a lot of choices to be made. Ultimately, leaders are simply going to have to lead.”