States Looking To Cut Services, Raise Taxes as Revenue Declines, Budget Deficits Mount

With the majority of states facing "astonishing" declines in revenue and mounting budget deficits, many are "scrambling to find ways to get through the rest of the year without hacking apart vital services or raising taxes," the New York Times reports. According to the Times, problems in the financial markets have had an "immediate and widespread impact on state budgets" with the worst problems in states "where housing booms morphed into a large-scale mortgage crisis."

A health administrator in Nevada -- which depends heavily on sales tax and gambling revenues -- has said the state might be unable to pay medical claims in a few months. Meanwhile, New York Gov. David Paterson (D) has proposed a $5.2 billion savings plan that would include cuts to Medicaid and education, and California lawmakers are debating a 1.5-cent sales tax increase to address the state's record budget shortfall. According to the Times, California might be "unable to pay its bills this spring" if the deficit is not addressed. According to the Times, "plunging revenues ... have poked holes in budgets that are just weeks and months old and that came about only after difficult legislative sessions."

Earlier this year, California "could not get credit" when it sought to borrow to pay bills -- a step many states "regularly" take in anticipation of revenues coming in later -- and it "has since been largely interpreted as an outgrowth of the much larger national and international credit crisis," the Times reports. Scott Pattison, executive director of the National Association of State Budget Officers, said, "Long-term bonds may be at risk. And I think states are going to have to accept that cost of debt is going to be higher" (Steinhauer, New York Times, 11/17).

Opinion Piece
"[T]he federal government's ability to borrow is not limitless," and there is "something very strange about issuing debt to solve a problem caused by too much debt," South Carolina Gov. Mark Sanford (R) writes in a Wall Street Journal opinion piece, adding that he is opposed to the federal government providing a financial "bailout" to state and local governments. Sanford writes that such bailouts raise several questions, including, "Was the economist Herb Stein wrong when he said that if something cannot go on forever, it won't?" He adds that Medicaid grew at the "unsustainable" rate of 9.5% each year over the past decade and that "if Congress opens the checkbook now, there will be no reform."

Sanford writes that one thing the federal government could do to help states is "free [them] from federal mandates." According to Sanford, it appears that "the bailout train is being loaded up" and taxpayers "will have to speak up now to change its freight, tab or departure" (Sanford, Wall Street Journal, 11/15).