Democrats Discuss State Government Bail-Out

by Leroy Baker, Tax-News.com, New York

03 November 2008

As the US Treasury busies itself with putting into place the Wall Street bail-out package signed into law earlier this month, Congressional Democrats have renewed their calls for a 'Main Street' aid package targeting cash-strapped state and local governments as well economically hard-pressed families.

Participants at a House of Representatives Committee on Ways and Means hearing on Wednesday, which included state government leaders, discussed a number of proposals to prevent state budgets from sinking further into the mire, including assistance to help those states with shortfalls in healthcare funding. Other proposals included increasing unemployment benefits, investing in infrastructure and education, and boosting pensions.

“I firmly believe that if it took only two weeks for the Federal government to find USD700 billion dollars to bail out Wall Street and the bank executives that brought our financial system to the brink of collapse, then we ought to be able to find a fraction of that amount to help preserve essential services at the State level that will help lift up Americans out of poverty, expand opportunity for the middle class, and protect our economic future,” New York's Democratic Governor David Paterson told the committee.

Democrats have been talking for some weeks about a second stimulus package to help the low-paid and middle classes cope with the recession, and earlier this month House speaker Nancy Pelosi spoke of a USD150bn package to include a rebate and tax cuts. The House passed a USD61bn rebate bill in September; but a matching bill failed in the Senate. With George W. Bush still at the White House until January, and depending on who succeeds him, it is unlikely that a new stimulus package will be voted upon until early 2009. The new proposals however, have once again drawn attention to a looming crisis in state and local government finances.

A recent report by the Rockefeller Institute of Government suggests that US state governments are edging ever-closer to a revenue precipice. The Institute's 2nd quarter state tax collection update warned that tax collections were only "superficially strong" with states effectively living off the US economy as it was in 2007. In the second quarter of this year, state sales taxes were already falling, and corporate income taxes were down by 8.3% compared with the same period in 2007. Motor fuel taxes also declined by 3.4%.

“States are again facing the classic nutcracker effect of slowing revenue and rising prices,” Rockefeller Institute Senior Fellow Donald Boyd, co-author of the report, observed.

Arizona, Florida, Michigan, and Rhode Island have been suffering the most, the report noted, but nowhere has this nutcracker effect been more observed than in California, where increases in taxation and deep cuts in spending seem the only solution to the state's chronic deficit problem, which this year topped USD15.2bn.

“States didn’t cause this crisis and we shouldn’t be left to deal with it alone," Paterson argued.

"A rescue package from the federal government will help soften the blow for average Americans. It could make the difference between targeted, surgical spending reductions that will help heal our fiscal condition and massive and wide-ranging cuts that will cause irreparable damage to millions of families," he said.

Whether such a rescue package would prevent increases in state and local taxation remains to be seen.

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