(Un)Happy New Fiscal Year: Tax Hikes, Missed Budget Deadlines, State Shutdowns and Ongoing Fiscal Woes

Today, forty-six states begin Fiscal Year 2010, but ongoing fiscal woes and the widespread rollout of economy-dampening tax and fee hikes promise to make this one of the more challenging budget years in some time for cash-strapped states. As Stephen Fehr at reports today, FY 2010 is already off to an inauspicious start:

Four states closed billions of dollars in budget shortfalls and approved spending plans in the last 24 hours, but legislatures and governors in six states were still far apart on their budgets as the fiscal year began Wednesday (July 1).

Indiana, Mississippi and Delaware averted disruptions in government services by approving budgets in time for the new fiscal year. It was not immediately clear whether Arizona would escape a shutdown, even though its Legislature sent Gov. Jan Brewer (R) a final-hour $8.4 billion budget plan. The budget did not contain a temporary sales tax proposal the governor had sought to put on the November ballot. If she vetoes the budget, the government could stop operating. […]

States without budgets on the first day of the new fiscal year are Connecticut, Illinois, Pennsylvania, North Carolina and Ohio. California lawmakers approved a budget in February but falling revenue has knocked it out of balance by $24 billion.

California officials said they will be forced to issue IOUs because they will not have the money to pay all of the state’s bills. Pennsylvania and Illinois officials say they will keep essential operations going, but a protracted stalemate could begin affecting day-to-day services in those states in a few weeks.

Shutdowns were not a threat in Connecticut, North Carolina and Ohio, even without a new budget plan in time, because those states have provisions to temporarily spend without a budget. […]

The last time so many states blew the deadline was two years ago, when six states could not agree on a budget by July 1. The widening of the problem this year reflects a steady drop in tax revenue because of the recession, which has forced 48 states nationwide to close $166 billion of budget gaps.

Even in states that have approved budgets, July 1 is a day of reckoning because many of the budget cuts and tax and fee increases enacted by legislatures go into effect. In Nevada, for example, a record $1 billion in tax increases begin; Las Vegas now has an 8.1 percent sales tax. Twenty-five states boosted taxes this year, according to the Center on Budget and Policy Priorities, a Washington, D.C., think tank.

Hardly a week goes by without another state budget problem surfacing. On Tuesday, Kansas Gov. Mark Parkinson (D) said that since the Legislature approved a pared-down state budget earlier this year, tax revenue has fallen so sharply in May and June that another $135 million in cuts will be needed as the fiscal year begins.

Without the federal economic stimulus package, state budgets would be even more out of whack. Stimulus money has closed about 40 percent of state budget shortfalls, according to the Center on Budget and Policy Priorities.

In many ways, while we did see some modest state belt-tightening in FY 2009 and a lot of interest in privatization, streamlining government, and developing fiscally sustainable budget tools and processes, the influx of federal stimulus dollars papered over budget problems in many states and helped policymakers avoid making necessary and politically unpopular decisions.

Despite routine Chicken Little claims of “decimating vital programs” and “cutting needed spending to the bone” across the states (a guaranteed rhetorical response to cutting ANY spending), draconian cuts hardly occurred in most states. Spending cuts rarely exceeded 10 percent (hardly “decimating”) for agencies, programs or categorical spending, by and large, in most places.

But the stimulus gravy train is going to run out, and policymakers are going to have to starting facing the inevitability of substantial reductions in the size, scope and price of government in earnest this fiscal year to close well in excess of $150 billion in budget deficits this year. That’s why, for example, the Arizona House of Representatives’ decision yesterday to let politics destroy a bill that would have created the strongest privatization and government efficiency board in the nation is so disheartening and puzzling (it obviously wasn’t a statement on privatization, as there are several discrete privatization and asset sale/lease proposals embedded in the budget). Conversely, the looming intensification of the budget crunch also explains why the Louisiana legislature’s passage of a bill codifying Gov. Bobby Jindal’s Commission on Streamlining Government into statute is such a prescient and sensible action.

Solutions like these need to become part of the fiscal solution for states immediately, because if you think “Happy New Fiscal Year” sounds like a joke now, just wait until this time next year. The only thing standing between a “Year of Fiscal Responsibility” and a “Year of Budget Insanity” is the political will to take the necessary steps to reduce the cost of government.

Reason’s Privatization Research and Commentary