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State budget deficits: Here come the tax hikes

Today's Financial News - Posted October 13, 2008

The slowing economy is hurting everybody, including state and local governments. At least 29 states are expecting budget shortfalls over the next twelve months. Taxes are going up and spending will go down. It is all happening at the worse time possible.

By Andrew Snyder

Baltimore – (TFN): I woke up this morning to some not-so-great news. My alma matter (yes, the very college that nurtured and sculpted my intellectual prowess) will be forced to swallow a major budget cut. It could have as much as $50 million less to spend next year.

When I first heard the news, it was about five minutes before six this morning. Of course, my first thoughts were of doom and gloom.

What about the new intramurals coed water polo team? How will it afford new swim caps?

Or what about the new student-produced film viewing studio? Will the school be able to afford to keep the million-dollar projector running or will the sound-proof room get filled with boxes and storage totes just like the studio it replaced?

All sorts of questions like these ran through my head. It is a phenomenon that is not just happening on my old stomping grounds. State and local governments across the country are suddenly finding their tax revenues drastically reduced, creating huge holes in their budget.

It threatens to end all superfluous spending projects. Oh no.

States go broke

We have all heard about California’s woes. But how about Connecticut, Maryland, Pennsylvania, and the 25 other states expecting major deficits over the next year.

In the state where I did my undergraduate work, Pennsylvania, the problem is similar to the issues faced in most other states. Spending has been out of control for years. Tax rates have been raised as high as they can get.  Any higher and the citizens will revolt. Now governors and state congresses are in a real pickle.

In Pennsylvania, the shortfall is somewhere in the range of $800 million to $2.5 billion. Thanks to a tax-revenue decline of nearly 5% over the last quarter, or $281 million, the state is in real trouble if the economy slows any more.

There is no doubt, major spending cutbacks are on the way. A hiring freeze has already been enacted. And you can bet taxes will go up.

The timing of these nationwide state cutbacks could not be worse. When the economy takes a nosedive, America needs its local governments the most. They are expected to be the employer of last resort. They are supposed to increase welfare benefits during downturns. And they are expected to lower taxes when times get tough.

But thanks to the ineptitude of our elected officials, state governments are looking no better managed than some of the companies we have seen on the bankruptcy roles over the last few weeks.

My guess is, we will see more of both varieties looking for a bailout as this economy unravels.

I just hope the marching band gets the trumpet wax it so desperately needs.


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Posted by Andrew Snyder · Filed Under Politics 

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