What is next for global economies?: States Confront Wide Budget Gaps Even After Years of Recovery

I am reminded of Winston Churchill’s following quote when it come to the next topic. I am certain the American’s will do the right thing. Eventually once they have exhausted every other alternative. Back in 2008 we pointed out what happened to Government post the Aussie crisis in the 90’s. The government pulled it's spending in and cities amalgamated in order to balance the budget and not hike tax’s etc. Aivars Lode

By Julie Bosman

CHICAGO — In Illinois, fights over the state budget and its $3 billion shortfall have hit such an impasse that Gov. Bruce Rauner, a Republican, issued a dire warning last week that a “major, major restructuring of the government” was around the corner.

In Kansas, centrist Republicans have joined Democrats in attributing the state’s $400 million budget gap to deep tax cuts passed in 2012 and 2013 at the urging of Gov. Sam Brownback, a conservative Republican.

And in Louisiana, lawmakers in the Republican-controlled State Legislature are in a standoff with their party colleague Gov. Bobby Jindal as they struggle with a $1.6 billion shortfall.

Though the national economy is in its sixth year of recovery from the recession, many states are still facing major funding gaps that have locked legislatures in protracted battles with governors. In some states, lawmakers have gone into overtime with unresolved budgets, special sessions and threats of widespread government layoffs. Only 25 states have passed budgets, according to the National Association of State Budget Officers, which tracks legislative activity.

While some states led by Democrats are having budget problems, too, there are far more states where Republicans control both the legislature and the governor’s office: 23, compared with seven states controlled by Democrats. Some of the bitterest budget fights this year pit conservative Republicans against centrist Republicans over how to cut spending or raise taxes.

Fallout from the budget battles, though unlikely to be felt soon, could well be significant. Taxes on income or commodities like cigarettes may go up in several states. School programs and class sizes could be affected if education funds are reduced. And some states may have to resort to layoffs or furloughs, potentially leading to slowdowns in government services.

Many of the legislatures that are struggling with budgets can point to external forces, including slow economic recoveries and rising health care costs, for their woes. “This is very different from past recovery periods, where you had fairly robust revenue growth at the state level,” said Scott D. Pattison, executive director of the National Association of State Budget Officers. “We’re not seeing enough revenue growth to solve some of the problems that we’re seeing.”

But many others have their own policy decisions to blame, budget experts say. Longtime bipartisan neglect of pension obligations has caught up with lawmakers in Illinois, New Jersey and Pennsylvania, and deep tax cuts in Republican-dominated states like Kansas, Louisiana and Wisconsin have contributed to budget shortfalls as economic growth has fallen short of projections.

“A lot of governors have cut their taxes with the hopes that that would bring increased economic activity and they could postpone painful decisions about spending reductions,” said Tracy Gordon, a senior fellow at the Urban-Brookings Tax Policy Center in Washington. “But those increases in economic activity haven’t come to pass.”

that their states have been held back by slow economic growth on the national level, and that keeping taxes low is the best way to add jobs and revive the economy in the long run.

Gov. Scott Walker of Wisconsin made the case for tax cuts during a speech in Michigan last month. “We can charge you higher rates, and a few of you might be able to afford to pay it,” he said. “Or we can lower the rates, broaden the base. More people are part of the economy, we see revenues go up even while rates go down, and the economy gets better for everyone.”

Louisiana’s fiscal troubles can be traced to the economic boom that followed Hurricane Katrina in 2005, when rebuilding efforts, insurance payouts and federal money pushed cash into the state budget. Many lawmakers expected the heady times and increased revenue to last, and they made the bold decision to cut income taxes by roughly $700 million annually for the highest brackets — a decision some are now second-guessing.

“We chose to give away more tax credits, incentives and rebates over the past seven years than there were revenues coming in to sustain state government,” said Representative Jim Fannin, a Republican and the chairman of the Legislature’s budget-drafting Appropriations Committee.

But while Republicans in the Legislature are prepared to raise some taxes, Mr. Jindal has insisted that there be no net increase in taxes and has threatened to veto any spending plan that includes one. After juggling proposals ranging from increasing cigarette taxes to reducing tax incentives for solar power, lawmakers have yet to devise a plan that meets the governor’s demands.

Shannon Bates Dirmann, Mr. Jindal’s spokeswoman, said his veto threat was real. “He wants families to keep more of their hard-earned money rather than sending it to state government coffers, because it helps cultivate a strong economy,” she said.

Democrats control the General Assembly in Illinois and held the governorship until January, after Mr. Rauner, a businessman, was elected in November. He is facing one of the worst fiscal crises in the state’s history, in large part because of pension costs that accumulated under previous governors from both parties.

Mr. Rauner warned last week that to close the budget gap, he might reduce services for the elderly and working poor and abandon ambitious plans for highway infrastructure. As the legislative session came to a close on May 31 with an unresolved deficit, Mr. Rauner told reporters that the conflict could stretch on all summer.

In Kansas, lawmakers elected on anti-tax platforms are now debating competing proposals to increase sales taxes, and business and individual income taxes, to address a $400 million shortfall.

Operating under the assumption that Kansans prefer “consumption taxes over income taxes and want no increase of burden on property taxes,” Mr. Brownback has proposed increasing sales and cigarette taxes and restoring taxes on some income for small businesses. But he wants to continue to phase in his income tax reductions. Critics argue that his plan places the burden for deficit reduction on low-income Kansans, who are most affected by sales tax increases.

Some of Mr. Brownback’s staunchest allies have also disagreed with parts of his plan, and lawmakers have held marathon debate sessions that have pushed their legislative session past the 100-day mark for just the sixth time in state history. State agencies were bracing for a government shutdown until Saturday night, when the Legislature passed a bill that averted furloughs for 24,000 state employees.

In Alabama, lawmakers are expected to return to Montgomery, the capital, this summer for a special session amid a budget stalemate that has pitted competing plans from the Republican governor, Robert Bentley, and the Republican-dominated Legislature to resolve what the governor says is a long-term $702 million shortfall.

A revenue-raising proposal to legalize casino gambling failed, as did one that would have shifted millions from the education budget to the state’s General Fund. Lawmakers approved a budget Thursday that would impose cuts totaling about $200 million, including to the budget of the state agency that manages Medicaid, but Mr. Bentley vetoed it.

Mr. Bentley has called that plan “unworkable” and “irresponsible” because of the severity of the cuts, proposing instead that the state raise several taxes. “It really is going to hurt the people of this state,” he said last month. But while the House signaled that it was prepared to raise some taxes, the Senate has made its opposition clear.

In Wisconsin, Mr. Walker signed into law last year a $541 million tax cut that benefited both families and businesses. But expectations of a surplus dissipated amid slow job growth, and now the state faces a budget shortfall of more than $280 million.

Mr. Walker has proposed closing the gap by decreasing funding to public schools, the state’s university system, public workers’ health benefits and state parks. Despite resistance from some legislators, particularly Democrats, the Republican-controlled State Legislature is expected to approve his plan by the end of the month.

In Alaska, lawmakers are trying to fill a budget deficit caused by a combination of lower oil prices and reduced oil shipments from the big North Slope fields. Alaska depends on oil revenue for about 90 percent of its budget, and it is facing a deficit that could reach $4 billion in a budget of only about $5 billion — with years of deficits projected after that as well.

The Republican-controlled State Legislature is now facing a critical question: how much to dip into savings to fill the gap. In fat years, the state built up more than $10 billion in rainy day funds, but budget officials say tapping it all would threaten Alaska’s long-term financial stability.

A number of states are enjoying surpluses. But even some of them are locked in battles over how to spend the money.

In Minnesota, the Republican-controlled House and Gov. Mark Dayton, a Democrat, are preparing to convene for a special session, having been unable to agree on a budget despite a surplus of more than $1 billion. After Mr. Dayton warned that he would start laying off state workers on July 1, the two sides seemed to come closer to an agreement.