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APRIL 2003
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Regional Exchange
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OPINION: Federal Fiscal Follies Imperil States, Cities
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By Neal R. Peirce
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 The fiscal prognosis for Americas states and cities flipped last week. It went from the unmitigated disaster likely to flow from the $726 billion tax-cut package President Bush has been demanding to a more moderate disaster: $350 billion in revenue losses.
Maybe its no accident that the two Republican Senators who withstood heavy White House pressure and forced the lower figure know lots about the pressures that state and local governments must labor under. Maines Olympia Snowe, one of the dwindling camp of Northeast moderate Republicans, served years in the Maine House and Senate. George Voinovich was both mayor of Cleveland and governor of Ohio.
The federal and state-local tax systems are theoretically separate. But theyre bound together by thousands of threads, from federal road and rail subsidies to joint ventures such as Medicaid and state income taxes tied directly to the federal schedule.
So a fiscally sick Uncle Sam dooms states and localities to hard times. Already the states, denied the luxury of deficit spending, face grave fiscal crises. Collectively, theyve cut tens of billions from their budgets for the year starting July 1, and still have $25 billion in cuts to go. For next year their prospective shortfall is $85 billion to $90 billionnearly 10 percent of their total operating budgets.
In the face of that extreme, the federal government ought to be helping out with emergency aid. Is it? No. Instead it wants to dump, counting the earlier Bush tax cuts, $1 trillion-plus in tax benefits into the laps of wealthy individuals whom it claims will use the cash to invest and stimulate the economy.
Can such a formula work? Not if you ask a group of such authorities as former Federal Reserve Chair Paul Volcker, former Treasury Secretaries Peter Peterson and Robert Rubin, and former Senators Bob Kerrey, Sam Nunn and Warren Rudman. In a joint New York Times op-ed article last week, they warned the Bush tax cuts would lead to cumulative 10-year deficits ranging from $4.2 trillion to $6.7 trillion, eventually slowing the economy, raising interest rates to pay off the national debt, and lowering the national savings that can be devoted to productive investments.
The long-term result, clearly, may be a fiscally paralyzed national government, unable to rise to new and unforeseen challenges.
And this wild throw of the fiscal dice is being made less than a decade before a tsunami of baby boomers start to retire (from 2011 on), presenting gargantuan demands for increased Social Security and Medicare outlays.
On the one hand Bush and Co. moved us into the Iraq war, at a total cost sure to exceed the $75-plus billion just asked for and appropriated. On the other hand, the administration and its congressional allies continue to press for all manner of immediate domestic aid cuts, ranging from Medicaid and low-income housing to vocational education and after-school programs.
The Bush camps fiscal leadership on the homeland security costs that the states and cities are shouldering has been extraordinarily weak. And now, if the president has his way and gets stock dividends exempted from income taxes, the federal government will virtually erase the incentive for wealthy individuals to invest in low-income housing tax creditstoday the nations largest source of low-income housing construction and rehabilitation. (This comes at a moment when housing is more unaffordable than ever for low-income Americans including, you may have noted in Iraq war coverage people who most quickly join our military, hoping for some better opportunity in life).
Another serious warning: Up to now the countrys real estate boom hasnt seriously deflated. But it may soon, and some reports indicate softening has already begun.
That could bring serious consequences. In a very real way, cities were protected from recession by sustained real estate prices that translated into a continued strong flow of returns from their big source of revenueproperty taxes. But now cities face twin perils: First, a bursting of the real estate bubble, and second, governors and legislatures, increasingly desperate to balance budgets, are deciding to cut heavily into assistance to localities.
However one reads these economic tea leaves, the bottom line is clear: real danger is building for the state and local governments that account for a lot of our common welfare, from public safety and education to the environment and basic infrastructure. After all, states and cities are where we all actually live.
Yet we have a national administration that seems bent on an ideologically driven course of reckless fiscal policy.
The risks are enormous. Soon, the hurt and peril will spread from the disadvantaged to everyone who relies on any public serviceall of us, in short. Must we wait until then before we cry halt?
Copyright © 2003 Washington Post Writers Group
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