Hollywood, Florida
When we met one year ago in New Orleans, states faced a challenging fiscal crisis. After several years of booming economies and budget surpluses, states suddenly had to close budget gaps of $40 billion for FY 2002. Over the last year, this crisis has deepened. Shortfalls at the beginning of FY 2003 were almost $50 billion, and gaps of $25.7 billion through the end of FY 2003 have recently emerged. Shortfalls ranging from $69 billion to $85 billion loom for FY 2004.
The states’ dire situation results largely from national circumstances they do not control – the economic downturn, federal tax and budget policies and increased costs for homeland security – and call for solutions from the federal government.
- Since March 2001, the nation has lost 2.2 million private-sector jobs, resulting in a significant decline in state revenues. Meanwhile, demand for public services, especially health care, has shot up: Medicaid costs rose 13 percent in FY 2002 and are expected to increase another 9 percent in FY 2003, while enrollment is projected to rise 7.7 percent.
- Federal rules governing estate taxes and bonus depreciation enacted in the past two years may cost the states as much as $15 billion in estate tax and $4 billion in business tax revenues. The President’s proposed FY 2004 budget includes 11 tax cuts that carry a ten-year price tag of $64 billion for the states. And the President’s plan to eliminate taxes on dividends will make municipal bonds less attractive to investors, costing state and local governments an estimated $77 billion to $155 billion over the next decade.
- States have absorbed billions in added homeland security costs since the 9/11 attacks. Extraordinary events, such as the recent elevation of terror alerts, only add more to these costs.
In addition to these national factors, billions in imprudent state tax cuts in the 1990s, totaling more than $35 billion between 1995 and 2001, and an explosion of corporate tax loopholes have played a role in the budget crisis. The corporate share of total state tax revenues declined from 10.2 percent in 1979 to only 6.3 percent in 2000, largely because states have increased the number and size of business tax breaks. Further clouding the states’ revenue picture, the Supreme Court’s decision barring states from collecting sales taxes on most remote sales – Internet and catalog purchases – deprives states of billions in revenues and gives Internet and catalog retailers an unjustified competitive advantage over the states’ in-store retailers. According to the General Accounting Office, states will lose as much as $20 billion in revenues in 2004 because they cannot levy taxes on remote sales.
The consequences of the states’ budget crises are real and devastating for families and individuals who depend on the services, protections and benefits states provide, and for the public employees who deliver them. Because states must balance their budgets, they have no choice but to increase taxes or cut spending to close budget gaps. Sixteen states raised taxes in 2002, 24 have done so in FY 2003 and 24 are proposing tax increases for FY 2004. Ironically, these state tax hikes have the potential in the aggregate to offset reductions at the federal level.
Even worse, states are making deep cuts in staffing and basic programs to rein in costs. In FY 2002, 37 states cut spending; 34 have done so or propose to do so in FY 2003. Education, health care and basic family support programs have been hit hard:
- Twelve states cut K-12 education funding in FY 2002; nine are doing so in FY 2003. After-school and pre-school programs are being eliminated, essential construction and renovation has been deferred, and in some places, school districts are proposing to shorten the school year by weeks.
- Every state raised public university tuition and fees in the 2002-2003 school year, and 13 states are cutting higher education spending for FY 2003.
- Forty-nine states and the District of Columbia are implementing FY 2003 Medicaid cost containment plans. At least one million people may lose all Medicaid coverage, and benefits have been cut for another one million.
- Eighteen states and the District of Columbia have cut their TANF programs even though TANF rolls have increased during the downturn.
- In seven states, eligibility for childcare aid has been tightened; five states have hiked parent fees.
- Eight states in FY 2002 and 12 in FY 2003 reduced aid to localities, forcing layoffs in cities and counties and sending school districts scrambling to make up for lost state revenues.
- Fifteen states laid off government workers in FY 2002; ten plan to do so during FY 2003.
The states’ belt-tightening threatens to jeopardize basic services that many people – especially low-income families, children, the disabled and the elderly – rely on. More cuts of this nature will have dire consequences for families and will place added strains on the state and national economies.
The AFL-CIO and its affiliates are committed to restoring the national economy and reviving state economies. The two go hand-in-hand: The national economy cannot and will not recover until the economic health of the states is restored, and state economies will continue to suffer until the national economy resumes the robust growth it enjoyed during the late 1990s.
Additional costly budget cuts such as those the states have already made are not the answer to the states’ fiscal crisis. Instead, the federal government must step up to the plate with substantial resources to help the states. Although Congress and the President have finally agreed to provide $3.5 billion in homeland security funding – more than one year after the President first promised to do so – this belated gesture is only a fraction of what the states need, and even these funds are unlikely to reach the states for months. In addition to securing additional federal aid, the states must restructure their tax codes to require businesses and the wealthy to pay their fare share.
THEREFORE BE IT RESOLVED
The AFL-CIO and its affiliates will lobby against and work to defeat the Administration’s misguided tax policies and FY 2004 budget plans. These proposals will not create jobs or otherwise grow the economy. Instead, they will further deplete states’ revenues. We will continue to push for federal legislation providing substantial, direct and essential financial support to the states, including federal aid to help states offset some of their Medicaid costs and to meet the ever-growing demands of boosting homeland security.
The AFL-CIO and its affiliates will oppose further program cuts or layoffs of public employees as the means to close state budget gaps. We will support state-based revenue-raising measures, such as eliminating corporate tax loopholes, decoupling of state tax rules from the corresponding federal rules, and higher taxes for businesses and those who are wealthiest and best able to afford them. In addition, we will encourage states to sign on to the Streamlined Sales and Use Tax Agreement, a multi-state agreement that creates a simplified sales tax system that will facilitate states’ capacity to levy taxes on Internet and other remote sales pact. Concurrently, we will push Congress to pass legislation authorizing states that have joined the Agreement to collect sales or use taxes equally from all retailers, including Internet and other remote retailers.