How To Balance A Budget

SEVANS/AP University of Massachusetts students protest cuts in state funding for tuition

If you think it takes a long time now to get a new driver's license, wait until next year. The line at your Department of Motor Vehicles (DMV) may well be out the door and around the corner — assuming the office is even open. And when it's finally your turn at the counter, expect to pay more for that really bad mug shot taken by an especially grouchy DMV jock who has just been told not to plan on any pay raises before the kids leave home. You can only hope the experience doesn't leave you with an ulcer, because if you're on any kind of health-care assistance, you may find that you no longer qualify. Even if covered, you may find that the nearest hospital has been shut down, along with a wide range of state-funded facilities and services that will impose hardship on millions of Americans next year.

Though we hope nothing like this happens to you, get ready for the most severe state-budget crises since World War II. As Governors across the U.S.--24 of them newly elected — prepare to ring in 2003, the only thing they are celebrating is that they have lots of company in their fiscal misery. Laws in all states except Vermont require a balanced budget. To achieve that in the current fiscal year, which in most cases runs through June 30, states must slash spending and tack on fees and taxes. What they are pondering ranges from the relatively painless (new taxes on tobacco and expanding gaming and lotteries) to the inconvenient (shortening hours at DMV and welfare offices) to the positively painful (closing hospitals, parks-and-recreation departments and libraries, cutting Medicaid, raising college tuitions and laying off thousands of state employees).

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The main source of the states' budget distress is plunging tax revenue stemming from the economic and stock-market downturns. State receipts, largely from sales and capital-gains taxes, fell 6% last year, the first decline in more than 50 years. The states are running an aggregate deficit that is expected to reach $68 billion by June 30. Not even a sudden economic revival would mend what amounts to bad luck (the recession) teamed with years of poor planning and an ancient state-tax system that largely ignores the fastest growing part of the economy: services. You don't pay tax to have a tooth pulled, your taxes done, your lawn mowed or a lawsuit filed. That may have to change. Goods bought over the Internet are often tax free, and that too might have to change.

In the meantime, the states have pressed Washington for money to pay for things it has demanded — among them, homeland-security initiatives, election reform and broader Medicaid benefits for the poor. Beset by federal deficits, the Bush Administration is unlikely to provide much help at a time when it is focused on tax cuts and a possible war with Iraq. The states are being left to deal with their crises pretty much alone, but they plan to share their burdens in any way possible. One area ripe for cuts is state aid to municipalities and local transit authorities, so the crises are going to spill into how often your trash gets collected and when the bus runs.

The plight of Harrison township in southeast Michigan is typical. Through the 1990s, local authorities did next to nothing to increase tax revenue, counting on bountiful state pass-throughs as a booming economy and stock market boosted the state's sales-and capital-gains-tax revenues. Indeed, many states were able to support municipalities and cut tax rates at the same time, a strategy that critics say is backfiring and is more to blame than the recession for the states' fiscal mess. Michigan is cutting revenue to townships like Harrison. Governor John Engler is expected to announce some $470 million in total budget cuts this week. Harrison township has already had to shut down its recreation department, sell 12 vehicles, slash $16,000 earmarked to clear seaweed that hampers boat traffic near the Lake St. Clair shoreline and cut $19,000 for improvements to dirt roads. The town board had to approve a special assessment last week to cover police and fire protection. "People still don't have their eyes open," says newly elected township supervisor Mark Knowles, the first Democrat voted into that office in 33 years. "They're going around saying, 'You're raising taxes! You're raising taxes!' Yes. But they weren't paying enough to begin with. They just got caught sneaking into the movie theater."

The dire fiscal straits have been visible for some time, but state and local officials were able to paper over their problems by depleting rainy-day funds — surpluses built during boom years — and tapping other onetime sources of cash to keep the budget in balance without encroaching on the everyday lives of most people. But that tactic has been exhausted. Already, many states have broken a trend of tax cuts that began in 1994--raising taxes by an aggregate $9.1 billion last year.