Even when economy gets better, state finances probably won't

WASHINGTON — WASHINGTON -- The fiscal foundation of state government is cracking, and it will take more than a patch to repair it.

States will have difficulty making ends meet even when the economy improves because money is going out faster than it comes in.


The problem is partly caused by expensive mandated programs for the poor, which consume an increasing share of state budgets and leave less for other programs.

Over the next several years, state officials foresee nightmarish choices between higher taxes and diminished services to increasingly desperate citizens.


"Things are going to have to give, given the fact that most economists don't project the kind of growth we had in the '80s," warns Scott Mackey, a policy specialist with the National Conference of State Legislatures.

Some officials believe radical changes are needed in state taxing systems -- expanding the sales tax to encompass services, for example. Some want the federal government to take more responsibility for certain programs.

Above all, state officials want something done about Medicaid, the federally required health program for the poor.

"The spending paths states are on right now seem to require something like 6 to 7 percent revenue growth, and no one believes states are going to be getting that," says Marcia Howard, deputy director of the National Association of State Budget Officers.

Maryland's Medicaid costs have doubled since 1987; they're expected to reach $1.6 billion this year. Nationwide, state Medicaid costs jumped 20 percent from 1990 to 1991.

Medicaid costs are out of control because health-care costs are skyrocketing and the number of eligible poor people has increased during the recession.

States such as Maryland have resorted to gimmicky taxes on health-care providers to help cover some of the rising cost of Medicaid, but they don't solve the problem.

"It's just going to get worse," Mackey says. "Until Congress deals with the health-care program for poor people, we don't see any relief from these double-digit increases for Medicaid costs."


Medicaid isn't the only big expense. Welfare costs are rising. Prison costs are soaring, fueled by the war on drugs.

"The state is incarcerating people at a rate that will drive the prison population from 18,000 to 30,000

by the year 2000," says Del. Charles J. Ryan, chairman of the House Appropriations Committee in Annapolis. "At that rate, we'll be spending for corrections in the state of Maryland what we are spending for higher education in the year 2000. That clearly is not a good allocation of resources. We have to look at different things we can do."

Medicaid and prison costs weren't as much of a problem in the 1980s because state revenues grew rapidly. In 1987, states spent about 10 percent of their budgets on Medicaid; now it's 14 percent.

"If one part of the budget, a substantial part, is growing at 12 percent, and revenues at 6 percent, you've got to take something away, and we're doing that," says Ryan, referring to recent budget cuts.

When the economy improves, sales and income tax revenues will increase. But the sales tax doesn't keep up with economic growth because it is generally not applied to services, an increasingly important economic activity.


Voters might object to taxes on services. This year Massachusetts repealed an unpopular 1990 sales and use tax on general business and professional services.

Politicians complain about constituents who demand services but oppose tax increases.

"They want the service they want, but they don't want to pay for the other one," says Kaye Braaten, president of the National Association of Counties.

Counties and cities also feel the fiscal pinch. The end of the '80s real estate boom has diminished property tax collections, and states have drastically cut local aid.

Braaten is one of a number of local and state officials questioning the division of responsibility between the federal, state and local governments. Now all they do is point fingers at each other, she says.

"And we pass the buck on, one to the other, and we spend months, years, fighting who's responsible for what. We need to sit down and establish the federal government is responsible for health care, hypothetically, and the counties are responsible for something else."


California, often an innovator, boldly redefined state and local roles this year, according to Mackey of the state legislatures' group.

"What California did was turn a bunch of health and welfare programs back to the counties," he says. "At the same time, they gave counties authority to set benefit levels. And they also provided authority for a local county sales tax to pay for the programs, and turned over what were previously state revenues for motor vehicle registrations to the counties."