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Down And Out In Texas, California...


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DOWN AND OUT IN TEXAS, CALIFORNIA...

The recession may be over, but in state capitals the agony goes on. Just look at the recent news from around the country: Unable to close a staggering $9 billion deficit, California is preparing to pay vendors in IOU's, not cash. Texas is scrambling to close a projected $4 billion-plus shortfall in the next budget cycle. Florida lawmakers and Governor Lawton Chiles are at war over his plan to raise $1.3 billion in new taxes.

A fiscal crunch aggravated by the recession has turned legislative chambers into battlegrounds. Costs, especially for health care and prisons, are rising at record rates. Cities, reeling from the decay that helped spark the Los Angeles riots, are begging for help. The federal government, struggling with its own deficit, may be about to shift even more costs to the states. And tax hikes and service cuts have left voters in a surly mood.

But the worst news for states--and their taxpayers--is that a modest economic recovery won't bring much relief. The pain will continue long after the 1990-1992 slump fades into memory. Like the federal government, states have developed structural deficits, with revenues failing to keep up with soaring costs. "This is not just the recession," says Brian M. Roherty, executive director of the National Association of State Budget Officers. "You can't just put your feet up and wait for the turnaround." The upshot: Governors and lawmakers are thinking about major overhauls of their revenue systems, including value-added taxes.

Revenue hikes are a last resort, but it's getting tougher to cut spending. Outlays for jails and prisons increased last year by more than 11%. But the public clamor for stiffer sentences precludes cuts. Welfare is a popular target. But since 1976, state spending on public assistance has been slashed. By 1990, states were spending more to keep people in jails and prisons than on cash payments to the poor.

Unlike corporate executives, governors have been unwilling or unable to slash their labor forces. Despite the recession, states trimmed employment this year by less than 1%. Not only do public-employee unions resist the cuts, but so do many voters, who fear losing services. In Maryland, Democratic Governor William D. Schaefer helped build support for a $1 billion tax hike by threatening to lay off state troopers.

States are passing the fiscal distress down the governmental food chain. This year, 11 have cut aid to cities and counties, and others are shifting programs to local government, forcing them to scramble for funding.

BIGGER UMBRELLA. Even if states can find some spending reductions, the savings could well be overwhelmed by the explosion in medicaid costs. Medical benefits for the poor under the federal-state program are increasing by a staggering 20% a year and now account for 16% of state budgets. In Florida, medicaid costs have grown by nearly 500% over the past 10 years. "Health care," says state Budget Director Douglas Cook, "kills us all."

Many of the increases are beyond the states' control. Medicaid is suffering from the same cost explosion as all health care. Moreover, Washington, which pays about half the cost and makes the rules, has been forcing states to expand coverage. Until recently, pregnant women and children were covered only if they were on welfare. Now, states must provide benefits to poor pregnant women and to poor children 6 and under.

Still, services to pregnant women and children accounted for only one-third of the increase in medicaid spending in the late 1980s, according to the General Accounting Office. The states must also cover the disabled and elderly poor. Spending on the elderly--mostly for nursing-homes--accounts for more than a third of all medicaid spending. "There is no long-term-care program in this country, and that means that people are dumped into medicaid," says Samuel S. Flint, an official at the American Academy of Pediatrics.

And Washington may be about to turn the screws even tighter. With President Bush's support, lawmakers may soon adopt a constitutional amendment mandating a balanced federal budget. At the same time, Bush is urging Congress to adopt an annual cap on federal spending for such entitlements as medicaid. Under either scheme, it's a good bet that states will shoulder more of the burden.

That means more pressure on state and local taxes. This year, taxpayers in most states got a relative breather. After raising taxes by $25 billion in the past two years, states this year have hiked levies by about only $5 billion.

TAXING HAIRCUTS. But now state officials are beginning to discuss major tax reform. In Florida, Democrat Chiles has proposed taxing 99 goods and services now exempt from the state sales tax--everything from haircuts to legal fees. In 1987, voters forced then-Governor Bob Martinez to rescind his plan for a broad service tax. This time, GOP lawmakers are urging spending cuts instead. But, insists Doug Cook, Chiles' budget aide, "We're not going to practice budget anorexia. 'No new taxes' is not a credible response to the future."

The endless crunch is pushing Florida to consider a more drastic step--a state VAT. And the idea of substituting a consumption levy for existing business taxes has won the backing of the state Chamber of Commerce. "Regardless of how much money they want," says Chamber General Counsel S. James Brainerd, "they have to have a better way of raising it." In Texas, Comptroller John Sharp has proposed a 3.75% VAT to replace the current school property tax and corporate franchise levy. The plan will go nowhere this year, despite an anticipated budget shortfall in coming years. Texas business opposes it, but the idea won't go away.

Right now, there seems to be nothing but more pain ahead for beleaguered governors and legislators. Says Steven Gold, director of the Center for the Study of the States in Albany, N.Y.: "We're going to have to get a lot tougher on spending, and we're going to have to raise taxes." But just as Washington may be giving taxpayers a respite, states will be looking for ever more inventive ways to pay their bills.Howard Gleckman, with Susan B. Garland, in Washington, Gail DeGeorge in Miami, and bureau reports


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