States Need Jump-Start

By E. J. Dionne Jr.

Washington Post

October 19, 2001

AKRON, Ohio -- While Washington fiddles, the states are burning.

One state government after another is having to do exactly what you don't want governments to do in a time of recession: cut spending and raise taxes at the same time.

Because of the bad economy, said Ray Scheppach, executive director of the National Governors Association, "state revenues are falling off a cliff." The latest sad tale was told this week in Ohio by Republican Gov. Robert Taft when he laid out his plan for dealing with a deficit of just under $1.5 billion over the next two years.

Taft has proposed, among other things, $600 million in budget cuts and $465 million in tax increases (or, to use the more palatable term favored by the governor's staff, "loophole closings"). Not surprisingly, Taft's fellow Republicans in the legislature are balking at the tax proposals.

Taft has a lot of company in his fiscal misery. The governors who find themselves in fiscal trouble include some of President Bush's best friends. Among them are, to name just three, John Engler in Michigan, George Pataki in New York and the president's brother Jeb Bush in Florida.

The fiscal crisis of the states has been coming on for months. You'd think that friends of state government and states' rights -- which is to say Republicans in Washington -- would want to help them out in a stimulus package.

Instead, House Republican leaders are using our economic troubles simply to do what they wish they could have done earlier this year -- speed up tax cuts for the wealthy and throw in some special-interest breaks for business.

Treasury Secretary Paul O'Neill had it right when he declared that the Republican proposal was partly "show business." He meant it was written as a bargaining posture, not as serious legislation. No kidding.

The bill passed out of the House Ways and Means Committee includes such urgent measures as a retroactive repeal of the corporate alternative minimum tax. It would also make permanent a tax provision that allows lenders to postpone paying taxes on income from foreign lending. How these measures would help struggling Main Street businesses goes unexplained.

Even among business lobbyists, there's embarrassment about how these measures are narrowly tailored to particular companies. IBM, for example, would qualify for a government payment of some $1.4 billion -- about enough to cover Ohio's two-year deficit, according to Citizens for Tax Justice.

There's a much smarter, bipartisan way to stimulate the economy, built on the old Republican idea of revenue sharing. The federal government could institute emergency revenue sharing, direct payments to the states based on population and, perhaps, economic circumstances. That would help stop some of the cutbacks and tax increases that governors such as Taft are forced to propose because their state constitutions require balanced budgets.

This would have a direct, immediate impact by forestalling state measures that can only make the economy worse. James K. Galbraith, a University of Texas economist who has been pushing the revenue sharing idea, notes that direct purchases by state and local governments amount to nearly 10 percent of the gross domestic product. When the states cut back, everyone feels it. And, by the way, it is state and local public health systems that will bear the heaviest burdens in our bioterrorism scare.

States might even use federal money, as economist Alan Blinder has suggested, to cut sales taxes temporarily to spur consumer spending. Now that's stimulus.

In partisan terms, Republicans, who control 31 governorships, would be major beneficiaries from revenue sharing. State taxpayers would also be helped, but so would needy Americans. Asked which of his state's cutbacks concern him most, Paolo DeMaria, Taft's chief policy adviser, listed programs in mental heath, retardation and care for the elderly. "The people I worry about most," he said, "are in the human services area."

A balanced stimulus plan must also deal with our badly flawed unemployment insurance system -- those who lose their jobs should have first call on our help in a downturn -- and it might include tax rebates for low and moderate income taxpayers.

But if Washington wants to do a lot of good fast, it will come to the aid of the states. President Bush, a former governor himself, has spoken often of the comradeship he feels with state chief executives. The time to prove his friendship is now.

© 2001 The Washington Post Company