Nearly every state is facing enormous revenue problems now and in the foreseeable future. Total state revenue in fiscal year 2002 was some $38 billion lower than it was in the previous year after adjusting for inflation. Some 45 states lost revenue. Official state forecasts released to date suggest that state revenues at best will hold steady after adjusting for inflation in fiscal year 2003, meaning that none of that $38 billion is likely to be recouped this fiscal year. Indeed, the revenue hole could get even significantly deeper.
These revenue problems are taking a significant toll on the services provided by state governments, with mental health budgets being a prime target. Many states are reducing health insurance coverage and benefits for lower-income families, or increasing the amount that poor and near-poor families must pay to obtain health insurance. Furthermore, such cuts are likely to occur as states exhaust their rainy day funds and other one-time procedures for fixing their budgets.
How did the states get into their current revenue shortfall predicament?
Moreover, widely acknowledged structural problems with state budgets are likely to preclude significant growth in state tax bases even when the economy enters a full recovery, whenever that might be. For instance, state sales taxes are gradually eroding as the economy moves from (taxed) goods to (untaxed) services. Most states are suffering from increasing activity by corporations to exploit loopholes in state corporate income tax systems.
Raising Taxes to Alleviate the States’ Budget Crises
State legislators and other state policymakers will cast the budget debate this session as a spending problem and lay the blame on rising Medicaid costs. Health care costs are rising dramatically in the public and private sector. But the impact of the economic downturn in the states has been exacerbated by the large tax cuts implemented by states between 1994 and 2001.
NAMI advocates must make the link between tax and revenue decisions and spending decisions, and develop credible and principled revenue solutions that are fair, broad-based, and sustainable.
The Center on Budget and Policy Priorities has advanced a range of state revenue enhancement strategies, including:
States need to reconsider tax cuts made in the 1990s and in many cases ending them or enacting equivalent tax increases.