State of the States: Healthy

Black-ink budgets promise tax relief, better services

The Carter Administration has come up with a novel justification for its planned $61 billion federal budget deficit. It is necessary, officials argue, in part because Uncle Sam should put back into the economy money that states and cities are draining away by running big budget surpluses. The argument is more than a little questionable because these surpluses will not restrain the economy but will spur it by making possible state and local tax cuts and more spending on services. But there is no denying the basic fact: most state and municipal treasuries are indeed flush with more cash than they have had in many years.

Certainly there are exceptions. New York City, still seeking federal aid to fend off bankruptcy, was forced last week to find money to give a raise to transit workers and avert a threatened subway and bus strike. And the cost of removing last winter's mountainous snows has strained the budgets of some localities in the Northeast and Midwest. Not so, however, in the Sunbelt. For example, Houston, reveling in a record surplus of $24 million, is budgeting to train 500 new cops this year, more than triple the average for the past decade.

In the statehouses, there have been some dramatic turnarounds. Only three years ago, New York State faced a serious threat that a city insolvency would drag the state into bankruptcy too. Now the state expects a surplus of $360 million this year and is debating how much to cut taxes. Michigan last November projected a deficit of $78.4 million in its 1978 fiscal year, ending Sept. 30. Now it expects a $68.4 million surplus, and Governor William Milliken is proposing reductions in property and income taxes. Budget Director Gerald Miller agreed with a reporter that the estimate of a deficit was "a ploy." He remarked candidly that there are times "when it is appropriate to indicate the situation is not as good as it might be in order to hold down the level of spending."

Collectively, the nation's states and cities ran deficits in four of the first six years of the 1970s; the red ink in recession-struck 1975 totaled more than $6 billion. But last year states and localities rolled up an aggregate surplus of almost $14 billion. Jimmy Carter, in his January economic message, put the figure much higher: almost $30 billion, which, he said, was "a drag on the economy." Governors and state legislators, worried that Congress would use the figure as an excuse to cut federal aid, protest that Carter improperly counted $15 billion in "social insurance" funds that are used to pay pensions, workmen's compensation and temporary disability benefits. That money should not be figured as part of the surplus, the state officials contend, because it cannot be used in day-to-day operations.

State and city leaders like to brag that the surpluses are due to sound financial management. It is not idle boasting, but an even more important reason is the nation's economic recovery, which has raised the take from income and sales taxes. During the recession, most states and cities cut spending deeply, and generally they continued to hold back during the early days of the rebound. Last year revenues surged far ahead of spending, giving the states especially the pleasant problem of what to do with the money.

Many are reducing taxes. The Tax Foundation has added up proposed cuts in income taxes alone totaling $625 million annually in eleven states, including New York, Michigan and Minnesota. Property taxes are another favorite target, since they have provoked citizen revolts in many areas. California wound up last year with a $2.9 billion budget surplus, largely because, in line with Governor Jerry Brown's celebrated small-is-good philosophy, the state severely held down spending. Now flush California is planning to cut citizens' property taxes by $1.4 billion.

Some states and cities will also step up spending. David Levin, an economist at the U.S. Commerce Department, figures that state and local spending for sewer, water and recreation facilities will rise at least 10% this year. Texas, enjoying a surplus of $3 billion, plans no tax cuts (it has no income tax anyway). But during the next two years, it will pump increases of $1 billion into schools, $900 million into medical education, $528 million into roads and $525 million into health and welfare spending. Wisconsin will use $62.5 million of its surplus ($437 million for the 1977-78 biennium) to fund programs to reduce water pollution, and Arizona might spend part of its $26 million surplus on sprucing up the outmoded state prison, the scene of several riots and killings.

In some states, surpluses and what to do with them have become a hot political issue. Opponents of Arkansas' Democratic Governor David H. Pryor's tightfisted spending policies are demanding that he call a special session of the state legislature before the May and June primaries to decide how to distribute a $40 million surplus. Pryor, who will leave the statehouse this year to run for Senator so far has refused. When Wisconsin's Democratic acting Governor Martin Schreiber campaigns for election in his own right this year, he may be damaged by charges that the state's huge surplus came about because he kept taxes too high. Schreiber is now proposing tax cuts, but he and the legislature are squabbling over the size and type. Schreiber proposed a rebate that would have given $20 to the typical Wisconsin resident; legislative leaders are agitating instead for an 8% reduction in the rate of future income taxes.

Governors and mayors who might be embarrassed by big surpluses can take some ironic comfort in the thought that they will soon be dwindling. Higher spending and a probable slower rate of growth in the economy late this year will shrink the aggregate state-city surplus to somewhere between $5 billion and $10 billion in 1978. That is a tidy sum, but it gives officials less reason to keep federal deficits high.

This file is automatically generated by a robot program, so viewer discretion is required.