-Caveat Lector- http://www.washingtonpost.com/wp-dyn/articles/A16274-2002Dec5.html
washingtonpost.com Governors Cite U.S. In Fiscal Crises States Blame Tax Cuts, Congress's Funding Inaction By Jonathan Weisman Washington Post Staff Writer Friday, December 6, 2002; Page A01 The nation's governors are increasingly fingering the federal government as a major culprit in their widening fiscal crises, pointing to billions of dollars in tax cuts and new spending mandates that Congress and the Bush administration have foisted on the states. Last month, the National Governors Association (NGA) declared that the states are facing their worst fiscal crisis since World War II, as governors and legislatures struggle to close budget shortfalls totaling $67 billion. Standard & Poor's, a credit rating agency, has warned of a possible downgrade for bonds issued by nine states, including California, Indiana and Arizona. Governors of both political parties are ratcheting up their demands and emphasizing Washington's responsibilities. As the Council of State Governments convenes in Richmond today, Virginia Gov. Mark R. Warner (D) plans to appear with state lawmakers and other governors, including Parris N. Glendening (D) of Maryland, to demand federal help to cover mandated expenditures for Medicaid, road construction and emergency response. Warner's speech follows a meeting Monday in North Carolina, where a group of governors met with Education Secretary Roderick R. Paige to insist that the administration provide adequate funds to cover demands imposed by President Bush's new education law. Administration officials faced a barrage of complaints last month at the NGA meeting in Austin. "In every one of those meetings the topic has been exactly the same," said Glendening, "the state of the economy, the federal government's role in causing much of the problems the states are facing and deep concern over the federal government's lack of a response in any way." Among governors, that sentiment is bipartisan. "I realize the federal government can't go in and rescue everyone. It's not all their fault," said Arkansas Gov. Mike Huckabee (R). "But when we hear that the government is going to bail out the airlines, to heck with the airlines. We're providing the services that you're supposed to be providing. Help us out." But Bush administration officials are resisting the governors' entreaties for direct federal aid. "As to the question of whether federal taxpayers should be on the hook for states' budget problems, I'm skeptical," R. Glenn Hubbard, chairman of the president's Council of Economic Advisers, told the Financial Times this week. Just who is responsible for that crisis is the subject of an increasingly heated debate. White House budget office spokeswoman Amy Call said it was unfair for the governors to blame Washington for their troubles. The states are grappling with the same forces that have pushed the federal government into deficit: rising health care costs and a sluggish economy that has sharply eroded tax revenue. And the administration has been trying to help, crafting waivers designed to rein in Medicaid costs and pushing proposals to expand private health coverage and provide prescription drug benefits to seniors. One Republican congressional aide suggested the governors' clamor for federal aid is nothing new and entirely predictable. A report last month by the Center on Budget and Policy Priorities pointed to a different culprit of the states' own making. The report noted that between 1994 and 2001, 43 states enacted major tax cuts. Those tax cuts are costing the states $40 billion in lost revenue each year, three-fifths of the current shortfall. States also made the choice to expand social programs and the reach of Medicaid, the costs of which are now exploding. But the report's author, Nicholas Johnson, said the governors are also correct when they say the states' problems have been exacerbated greatly by the actions of Congress and the White House. "There's plenty of responsibility to go around," Johnson said. The governors' litany of complaints is lengthy. On the tax side, last year's 10-year, $1.35 trillion tax cut included a little-noticed provision aimed directly at state coffers. Under the tax law, the federal estate tax diminishes at glacial speed over the next decade. But the law makes swift work of a provision that allows states to claim a credit from the federal government for estate taxes paid. The "state death tax credit" has already been cut by 25 percent, and will be gone by 2005, at a cost to the states of $4 billion a year, according to Harley Duncan, executive director of the Federation of Tax Administrators. This year's stimulus bill, which granted an additional tax break to businesses that invest in plant and equipment, also hit the states, because almost all of them have tied their own corporate income tax systems to the federal government's. Thirty states scrambled to "decouple" their corporate tax rates from Washington's to save as much as $15 billion over the next three years, but 15 other states have absorbed the revenue blow. "Utah at this point is, if not grinning, at least bearing it," said Gov. Mike Leavitt (R). Making matters worse, Leavitt said, Washington has so far blocked efforts by the governors to impose new sales taxes on the Internet, a medium that governors believe is costing their states billions of dollars in lost revenue. "We are progressively losing control of our tax policies," he said. On the spending side, governors say they are struggling to fund new burdens imposed by the federal election reform law, homeland defense requests, and education testing requirements, all of which were supposed to be financed in whole or in part by the federal government. State and local fire, police and medical rescue units were supposed to receive $3.5 billion this October to finance homeland security programs that Washington wants. So far, they have seen virtually none of it. The president's "No Child Left Behind" education law envisioned spending nearly $28 billion on new educational testing and teacher training. But the Bush budget requested $22 billion, and so far, Congress has approved nothing. Congress also hoped to give the states $2.1 billion to finance the election reforms requested, but, so far, lawmakers haven't approved a cent. "To pass these mandates without dollars attached when the states are so fiscally stressed is just not responsible," Warner said. Most importantly, the governors say they are simply losing control of their Medicaid budgets. For that, they largely blame Washington. When Medicaid and Medicare were created, Congress envisioned Medicare as the health insurance program for the elderly, while Medicaid would cover the poor through combined state and federal contributions. But the burden on Medicaid has grown steadily. The program now covers the long-term care costs of the elderly, and, in many states, their prescription drug costs. Congress's failure to pass a promised prescription drug benefit for the elderly has landed squarely on the states' shoulders, Huckabee said. And despite efforts by the Bush administration to grant state governments more flexibility to manage Medicaid, the states still lack the authority to control costs that grew by 13.2 percent this year, the fastest rate since 1992. "It violates the basic principle of good management to give us the responsibility to manage but no authority to manage with," Leavitt said. This summer, the Senate approved bipartisan legislation that would have temporarily placed more of the cost-sharing burden for Medicaid on the federal government. But in the face of strong White House opposition, the bill died. Now the governors are seeking a longer term solution that would force the federal government to assume responsibility for the long-term health care costs of seniors, and that too is facing White House opposition. Call noted that the federal government is facing budget problems of its own. Any new responsibility for Medicaid is bound to become a long-term burden. "We feel that if you change the [Medicaid] formula, it's a change in law, a permanent change," she said. 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