Jan | Feb 2014


Wants & Needs Meet What Government Can Afford

States Strive to Find a ‘New Normal’ in Providing Services

By Mary Branham, CSG Managing Editor
When Jennifer Granholm was governor of Michigan, she had to make cuts in state government—a lot of cuts.
“It was two terms of shrinking the size of government and dealing with the shrinkage of tax revenues … from the contraction in our economy,” Granholm said.
She cut nearly $15 billion of state spending, shrinking the size of Michigan state government by 13 percent, more than any state in the country, from the turn of the century to the end of her second term in 2011.
It was necessary, but it wasn’t easy.
Granholm and others believe many people elected with a promise of shrinking state government, cutting taxes and eliminating waste are finding out just how difficult it is.
“The kill government and drown government crowd, I just don’t think are living in reality,” she said. “We have to fund not just the jobs but the services those jobs provide.”
But states are required to balance their budgets, and funding those jobs and services takes an increasing amount of money, as everything from health care costs to fuel prices rise. With the Tea Party wave taking hold in state legislatures in 2010 with promises to cut or maintain current taxes, states across the country have had to find a way to shrink the government as well.
 

Cutting Taxes

As states pull out of the Great Recession, some policymakers have proposed slashing taxes or changing the tax code as a way to attract more businesses to the state and/or offer some relief to taxpayers.
But that’s treading on dangerous ground, according to economist Bill Fox, director of the Center for Business and Economic Research at the University of Tennessee. Fox studies state tax policy.
He said states are seeing an increase in tax revenues because of economic growth. Policymakers can feel comfortable in cutting taxes now, he said, because revenues are growing pretty well and growth rates and revenues are pretty strong.
“This sort of happened—not to the same degree—after the previous recession of 2004–05,” he said, “where states were cutting tax rates because they were on the upside of the business cycle.
“When the recession came, it was, ‘Oh, shoot, what do we do now?’”
Business cycles happen, Fox said. “If you’re on the upside, there will be a downside. States may be sorry that they’ve made those adjustments.”
But several states have made such adjustments. The Kansas legislature passed a bill to reduce individual income taxes and eliminate state taxes on business income claimed on individual returns. Gov. Sam Brownback signed that bill into law in May.
In Oklahoma, however, “The political will to reform the tax code was just not there,” House Speaker Kris Steele told The Associated Press. Gov. Mary Fallin’s plan to slash the top rate of the state income tax from 5.25 percent to 3.5 percent failed.
North Dakota voters in June considered eliminating all property taxes in the state. More than 76 percent of voters rejected the proposal.
By most accounts, North Dakota has weathered the storm of recession better than other states.
“We have a lot of money in North Dakota,” said Joe Miller, vice chairman of the state’s Senate Finance and Taxation Committee. “We’re doing pretty well.
“People see this money and want us to use it to lower their tax burden,” he said.
The problem is this: Property taxes are almost exclusively local, he said. “It’s difficult to lower the property tax burden when the state doesn’t levy any property tax.”
What the state has done is subsidize a share of residents’ local tax bills. That means the state is giving more money to the local school districts. Those districts, in turn, can’t raise rates, he said.
“The price tag keeps going up. We need to make sure we’re cutting taxes, not just padding budgets for people,” he said.
Miller, a Republican, isn’t opposed to cutting taxes.
“We need to cut taxes in this state because we do have the money to do it,” he said. “It’s very important that we cut taxes. We just have to make sure we do it in a way that is equitable, that somebody is not being penalized in the process.”
Miller was concerned about eliminating property taxes in the state and depending solely on a commodity-based tax system.
“The oil revenue that we’re getting needs to be used to fix our infrastructure, update things we haven’t updated in 50 years or more and sock it away for the future so we can keep taxes low for the future,” he said. “That’s the blessing we can get for the oil revenue, but we don’t want to become dependent upon it.”
Changing a state tax system isn’t easy, as policymakers in Oklahoma and Missouri learned this year.
Even in Kansas, where Brownback made cutting taxes his signature issue. The governor started the tax cut debate, but stressed the need for balance in a March news conference.
He said the tax cuts had to be balanced with “pay-fors” to keep the package responsible.
“That’s where you get the tough piece of it,” Brownback said in that statehouse news conference. “It’s easier to say, ‘I’m just for cutting all of this,’ and then, well, what about the hole that’s here in the budget?”
That’s the dilemma that Fox, the Tennessee economist, sees as well.
“It’s foolhardy policy to create tax structures based on revenue performance on the upside of a business cycle,” he said. “There will be a consequence at the other end.”
 

Shrinking Government

The more responsible way to deal with tough budget situations, Fox believes, is to have a serious discussion about what the states should and should not be doing.
“We need to figure out what government should do and get some sense of that from the expenditure side,” he said, “and we need to set a tax structure to be able to do that and then get out of the way and let government happen.”
While states have talked about shrinking government, few have offered concrete plans about what that really means. Some propose across-the-board cuts that reflect the amount lost with a shrinking revenue stream that comes with cutting or freezing taxes or from contracting economic growth.
“Across-the-board cuts are cop-outs,” said Granholm, the former Michigan governor.
Her cuts came from a scalpel-like precision on the budget. The state fair, a part of Michigan’s long history—gone. The Department of History, Arts and Libraries—no more grants.
“In order to prevent senior citizens from being cut off from Medicaid, … I prioritized health care for senior citizens and children and people with disabilities over that,” she said.
Those are the challenges many governors and legislators are still facing.
Take California, where the state continues to face a $16 billion shortfall.
“This means we will have to go much farther and make cuts far greater than I asked for at the beginning of the year,” Gov. Jerry Brown said in an online video.
Brown is proposing a tax increase, and is asking California voters to decide the issue in November. If voters don’t approve the hike, it will force severe cuts to schools and public safety, Brown said.
Like all California governors, Brown must submit his plan to the state’s Little Hoover Commission, a state organization in its 50th year that is charged with making recommendations to the legislature and governor on how to increase efficiency in executive branch operations.
It’s not an easy task, said Stuart Drown, executive director of the commission.
“Some quarters of government have not accepted the new normal and that’s really complicated the discussion about how to restructure government to make it more efficient and to deliver the level of services that we want to with the resources that we have,” he said.
Part of the California plan shifts some state responsibilities to the county level along with some, but not all, current funding, Drown said. Counties haven’t had the discussion about prioritizing the services.
James Mayer, executive director of California Forward, a nonprofit organization whose mission is to work with Californians to help create a “smart” government, calls the process “a devolution of responsibility.”
Some of it, like the statute that moves the responsibility for offenders from the state to county levels, is intentional, he said.
“Some of it is unintended because the state has stopped paying for things it had been paying for and they’re not necessarily things that people don’t want to do,” he said. “Often times, that means cities and counties are stuck trying to do it.
“The challenge is not just to be devolving, but to be truly realigning and re-engineering.”
Policymakers in some states are proposing to do just that.
Pennsylvania House Speaker Sam Smith, a Republican, proposed shrinking the size of his chamber from 203 seats to 153 seats and shrinking the size of the Senate from 50 to 38.
“In order to right-size Pennsylvania’s government, the legislature needs to put its own house in order,” Smith said in an April press release.
He argued that the legislature-constituent relationship wouldn’t be adversely affected.
“Real time communication with multiple friends and neighbors back in our legislative districts is as different from the telephone system of 1968 as that system was to the Pony Express,” he said in the release.
The Pennsylvania House approved the resolution in April. It is now under consideration in the Senate. Reducing the size of the legislature will require passage in two consecutive sessions, followed by approval from voters.
In other states, major reorganizations have been proposed or completed. In North Carolina, for instance, Gov. Bev Perdue combined three cabinet level agencies to create the Department of Public Safety, the largest agency in state government, that will employ 25,000 people. In Virginia, Gov. Bob McDonnell eliminated 19 state boards and commissions and combined 23 others.
 

Accepting the New Normal

While all that may help, many believe more action and serious discussions may be needed.
“It’s a matter of what you want to do, what you’re obligated to do and what your resources will allow you to do,” Drown said.
After those decisions are made, Granholm said, leaders must make sure everyone understands what they will get in the way of services.
“You have to be honest with citizens that they cannot have their cake and eat it too, especially in these tough times,” she said. “If they want good schools to send their kids to, then they are not going to be able to have zero taxes. It’s just not going to happen.”
Drown expects the tough decisions facing state policymakers will continue for some time.
“This is the new normal,” he said. “We’re going to have to be scrubbing this budget every year and coming up with new ways every year to do things better. That’s a lot of work and it takes a new approach to government.”
That said, Drown relates the words of former California Gov. Pat Brown at the inaugural meeting of the Little Hoover Commission that he believes are just as relevant today:
“Democracy itself is a process of change, and satisfaction and complacency are enemies of good government.”