Op-Ed: States Need to Drop the Budget Ax

By Karen Kraut

In the most shocking cut yet seen in the nationwide state budget cutting frenzy, 38,000 poor children in Arizona no longer have health insurance. Arizona policymakers eliminated the State Children’s Health Insurance Program–a first for any state–as a budget gap closing measure.

Like many governors faced with a budget crisis caused by the Great Recession, Arizona Governor Janice Brewer said she had a duty to cut this program in order “to preserve State government’s fiscal integrity and to ensure Arizona’s long-term health.”

But if the Governor really wanted to achieve these two important goals, she would have put the budget ax back in the shed.

This does not imply that state governments should stop looking for new efficiencies or dismiss concerns for frugality. These efforts must continue, as always.

Karen Kraut, Coordinator of the Tax Fairness Organizing Collaborative, a project of United for a Fair Economy

The problem is that budget cuts during a recession are counterproductive. They deepen the recession and stifle recovery by immediately putting people out of work, reducing public and private investment, and abandoning residents in their hour of need. At least 45 states have already cut programs ranging from K-12 and higher education to programs for the disabled and elderly, and more cuts are expected for the next fiscal year.

The long-term effects of budget cuts are also damaging: people become sicker due to lost health care coverage which means greater suffering, lost work days and productivity, and costlier medical treatment down the road. In the case of education cuts, kids learn in crowded classrooms with fewer resources, receiving a lower quality education, which leads to a less-skilled workforce and higher unemployment.

Calls for a more “balanced” approach—that mixes some cuts with some new revenue—steer us wisely away from a cuts only vicious cycle. However, with many jobs, essential public services, and the fate of the economic recovery hanging in the balance, even a balanced approach falls short by allowing for continued budget cuts that help no one.

Since budget cuts are harmful, do states have another choice? After all, states, unlike the federal government, are limited in their ability to engage in “deficit spending”—spending more than the money they raise each year.

Yes, there is an alternative. The best choice is progressive tax policy– not “progressive” in a political sense of being generally pro-tax, but in the economic sense of taxing individuals and businesses based on their ability to pay. Progressive taxation raises revenue, underwrites critical public investment, stimulates additional private investment, and maximizes job retention and creation. These are the remedies for achieving the twin goals of closing budget gaps and enhancing economic recovery. And to boot, progressive taxation results in long-term budget stability and more widely shared prosperity.

Progressive taxation is the centerpiece of several pragmatic approaches for closing state budget gaps delineated in a new report, “Solutions for Main Street: Progressive Guidelines for Closing Recessionary State Budget Gaps,” authored by economist David Shreve for the Tax Fairness Organizing Collaborative, a project of United for a Fair Economy that brings together 28 grassroots organizations in 24 states.

The new report offers three key guidelines for closing deficits while simultaneously enhancing economic recovery:

1. Make More Money Available: raise new revenue in a progressive manner; borrow more widely to fund infrastructure investments; use rainy day funds in a timely manner; and build trust funds wisely.
2. Make Tax Increases and Tax Reform One and the Same – enact progressive tax changes and repeal unworthy tax expenditures.
3. Encourage Federal-State Revenue Sharing

We have a ways to go to build the political will to enact these common sense reforms. To the extent that state governments have raised taxes to close budget gaps, they have too often increased sales taxes, fees, and less visible excise taxes. These types of taxes and fees fall more heavily on low- and middle-income people. While sometimes better than eliminating important programs, they are also counterproductive to economic recovery, because partly like budget cuts, they stifle demand, investment and economic activity.

Some states have made strides in the right direction. In Oregon, voters decisively approved two ballot measures that raised income taxes on upper-income residents and corporations. In less nationally publicized decisions, Kansas suspended its film production credit for two years, and Tennessee eliminated a tax exemption on rental income earned by certain businesses. But these progressive reforms were often coupled with deep budget cuts.

In Washington state, politics have prevented lawmakers from embracing most of the Guidelines’ best practices for the current budget cycle. However, the state’s fiscal problems are not going away, and its tax structure remains the most upside-down and unfair in the entire country.

In the short-term, the Economic Opportunity Institute has put forth a variety of revenue proposals– some of which align with our Guidelines– that prevent $2.2 billion of budget cuts. These proposals deserve to be revisited in 2011 if they are not passed this session. In the long-term, however, Washington’s fiscal and fairness failures will only be fixed by enacting steeply progressive tax reform.

Because so many people’s lives are being upended by this recession, it is critical that states not settle for ineffective approaches likely to prolong the economic downturn or delay the recovery. Progressive taxation is a state’s most effective anti-recessionary tool. It gets money moving through the economy again, jump-starting the economic recovery that is the principal engine of state fiscal health.

Karen Kraut is the Director of the Tax Fairness Organizing Collaborative (TFOC), a project of United for a Fair Economy.

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