Worst budget year since WWII forces states into big tax hikes

WASHINGTON – State budgets are in their worst shape since World War II, prompting legislatures to institute the largest tax increases in a decade, the National Governors Association said Monday.

Soaring health care costs and a sputtering economy that hurt tax collections were blamed for the budget problems.

State lawmakers responded with $8.3 billion in tax hikes for the fiscal year that began for most states on July 1. That was the largest dollar increase since 1992, when $15 billion in tax hikes were enacted, the association reported.

The report found that 23 of 49 states raised taxes; Florida did not participate in the survey.

Cigarettes and other tobacco products saw the biggest tax hikes, $2.9 billion, followed by sales taxes, $1.4 billion; corporate income taxes, $1.2 billion; and personal income taxes, $1 billion, according to the report.

Alcohol and gasoline were among other items that saw tax increases. More than a dozen states also raised various fees, including those for emergency services, driver’s licenses and filing of court records.

“It’s a pretty dire outlook for states,” said Raymond C. Scheppach, executive director for the governors’ group. “Unfortunately, even when the economy comes back, it will help, but I think states are going to continue in a very, very difficult situation for at least the next two or three years until, in particular, we get some major reforms in the Medicaid program.”

In Maine, the Legislature had barely enacted a $229 million budget-reduction package in mid-November to offset a revenue shortfall for the current fiscal year before revenue forecasters opened a new hole in the freshly patched budget by $44 million.

Meanwhile, a shortfall approaching $1 billion for the two-year budget cycle starting in July 2003 is bound to be a dominant item on the Maine Legislature’s agenda after it convenes in December. Gov.-elect John Baldacci has said he’s committed to avoiding a tax increase to bridge the gap between anticipated revenues and obligations.

Exploding health care costs, which generally make up one-third of state budgets, continued to outpace tax revenue for state governments, many of which already have cut services, combined programs and trimmed work forces to try to keep pace, the report said.

Spending on Medicaid, the state- and federally funded program for the poor, elderly and disabled, accounted for the largest portion of health care costs. It grew 13.2 percent last year, the fastest growth rate for the program since 1992, the report said.

The Senate passed a bill last July to send states $9 billion in Medicaid assistance. The legislation received support from both Democrats and Republicans, passing on a 75-24 vote, but has stalled because the House has not passed a similar plan. The nation’s governors are pressing lawmakers to revive the measure.

Scheppach said state revenues dropped last year by 6 percent, the first collective decrease since World War II. Nearly every state reported shortfalls at the end of the fiscal year, many even after dipping into rainy-day funds.

“We don’t have an estimate of the total shortfall because states are going back now and re-estimating revenues in budgets,” he said. “But my sense is, probably, we have a shortfall of at least $40 billion now. That’s going to be a drain on the economy going forward.”

The National Conference of State Legislatures reported last week that even after scaling back spending plans, states are seeing a $17.5 billion budget shortfall just three months into the fiscal year.