NCPA - National Center for Policy Analysis

States Cut Budgets, Raise Taxes

May 8, 2003

Senate Democrats this week proposed that Washington write the states a $40 billion check as part of a tax cut-economic stimulus package. The administration's tax plan and the version adopted by the House Ways and Means Committee this week contain no state handout. Senate Finance Committee Chairman Charles E. Grassley (R-Iowa), proposes to split the difference with $20 billion in additional state aid.

The Washington Post points out that:

  • During the 1990s state spending grew at twice the rate of federal domestic spending.
  • Nine out of 10 new state dollars went to education, health care (mostly skyrocketing costs for Medicaid, the health program for the poor, which now eats up about 20 percent of state budgets) and corrections.
  • States used some of the surging tax revenue to build up their reserves -- to the highest level in 20 years, almost twice what they had in the bank when the previous recession hit.

But almost every state also adopted permanent tax cuts between 1994 and 2001, now amounting to about $40 billion annually. States that cut taxes the most now face the deepest deficits, says the Post.

States' are taking action to address their financial difficulties, says the Post.

  • State revenue plunged more than 6 percent in 2002, the first year that states have suffered a decline in the more than 50 years such records have been compiled.
  • According to the National Conference of State Legislatures, Medicaid spending has been cut in 13 states, higher education in 12 (including Maryland) and K-12 education in nine states.

So far, 29 states have imposed across-the-board budget cuts, 15 states raised taxes in 2002, and at least 24 may do so this year.

Source: Editorial, "Helping the States," Washington Post, May 8, 2003.


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