TAX CUTS AND THE STATES

The speeches last week by Democratic Maine Reps. Tom Allen and Mike Michaud about the effects of the tax-cut proposal by the Bush administration were not so surprising. They pointed out that Maine state government would lose $40 million in revenue under the stimulus plan because the state’s tax code is linked with the federal code. With Maine already approximately $1 billion short for its next budget cycle, the additional reduction would make matters worse, they said, while doing nothing to help pay health care or new homeland security costs.

Their comments might be considered merely the opposing party putting the worst spin on the president’s plan, except they were not alone in making announcements last week. As they were outlining what Maine’s challenges would be under the tax cut, Republican Gov. Dirk Kempthorne of Idaho announced a last-resort plan to raise state taxes to pay for health care and education. GOP Gov. Mike Huckabee of Arkansas, reported Stateline.org, says he needs to raise the state’s sales tax to bring in an added $250 million. Republican Gov. John Rowland of Connecticut has proposed an income-tax increase for people earning more than $1 million a year. Gov. Rowland has a $2 billion shortfall next year, which he will get to once he solves the $650 million deficit his state faces in the current fiscal year. Republican Gov. Bob Taft of Ohio reported last week that his state’s budget deficit is so large it will likely require a tax increase, although he has yet to decide which tax or how much of an increase. GOP Gov. Rick Perry of Texas has a $1 billion problem in the current fiscal year and up to a $12 billion shortfall in the state’s 2004-05 budget.

Republican and Democratic governors are faced with the prospect of raising taxes mostly because they badly overestimated how much revenue they would lose from smaller capital-gains taxes but also because of tax-cut decisions at the federal level. This is not an endorsement for Maine’s governor to follow this pattern; each state’s situation is different. What they have in common is a federal government, which has already passed down two major unfunded mandates in the forms of education testing and homeland security, about to make their problems worse.

States, of course, cannot run deficits the way the federal government can and so cannot cut taxes and push off the cost of doing so to future taxpayers. Maine Sen. Olympia Snowe said she is concerned about the effect of the tax cut on states; Sen. Susan Collins says she wants fiscal relief to the states included as part of the stimulus bill and last week proposed with other senators a substantial increase in the federal

Medicaid reimbursement rate, worth $128 million to Maine over 18 months.

Without regard to whether the stimulus plan would work, the cost to states as it stands is serious and comes at a terrible time. Congress should include in any package of cuts, at a minimum, short-term protection for the states, either in the choices of tax cuts, through grants or, as Sen. Collins has proposed, increased funding in other areas, such as Medicaid.