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State Tax Revenues Up, Economy Still Down

July 19, 2010

While federal revenues have fluctuated almost daily, there has been a turn-around in the state’s coffers. A recent report by the Rockefeller Institute of Government in New York notes that state tax revenues rose 2.5 percent in the first quarter of 2010.

Although this might sound like encouraging news for a recovery in state economies, the real root of the increase in revenues is veiled in tax increases. Since the recession began, over thirty states have raised taxes, sometimes quite significantly. Major state revenue packages have been enacted in California, Connecticut, Delaware, Hawaii, Nevada, New Jersey, North Carolina, and Wisconsin. These tax increases are seen as a necessary evil to help keep states afloat.

Unlike the Federal government, many state governments must balance their budgets. This constraint often causes states to make steep cuts across the board. In 2010 these cuts were to the tune of over $85 billion dollars, as many states were forced to drastically reduce services and personnel and to promote a more efficient government. These cuts have negatively affected everything from education to police and fire protection. For example, Arizona has ended preschool for 4,328 children while eliminating temporary health insurance for people with disabilities who are coping with serious medical problems.

While taxpayers have consistently voted to decrease taxes in their states, the costs of state entitlement programs continue to increase. Veronique de Rugy, a senior research fellow at the Mercatus Center, testified before the House Committee on Oversight and Government Reform that, “The Treasury Department estimates Social Security’s deficit at 1% of GDP over the next 75 years and Medicare’s deficit at 4.8%. With federal revenues estimated to be about 19% of GDP in the long run under current law, taxes would have to rise by about one-third to pay all the promises that have been made for just these two programs… the fiscal path of this country is simply unsustainable.”

For many recession-battered citizens, the tax increases that helped fund this turn around could not have come at a worse time. In Washington state, 32 economists have been circulating a letter to public officials stating that “Increasing taxes at this time will shift necessary capital from the private sector to the public sector, thereby depriving private enterprise of the source of true economic growth and making Washington state even less competitive for new businesses and jobs.”

This is where President Obama and Congress come into play. Without the aid of the Federal government, states will face painful decisions despite the recent revenue increases. Certainly some of these decisions are necessary to streamline the fiscal processes and reform the fundamental workings of state institutions. Yet others, embodied in complete cuts of some education and welfare programs, will be so detrimental to the public’s lives that the federal government must take some sort of action. Funding should be provided with benchmarks that states must meet for additional rewards, and strings can be attached so that funds will be put to effective use. States will be expected to drastically cut inefficient spending and close tax loopholes –only then will the federal government provide some help to state financial woes. If the federal government plans to spend in the name of stimulus, placing funds in the hands of states most needing them with conditions of vast spending cuts to extraneous programming, then we should make sure the funding is properly utilized to help fix at least one of America’s problems.

-Alexandra Doan

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