A Tour of Six States

North Carolina
North Carolina's fiscal crisis isn't unique, but in a region where tax increases have long been political poison, the way state officials are dealing with it is.

The numbers are intimidating: The 2009–2011 budget showed a $4.6 billion difference each year between the revenues needed to maintain reasonable levels of service and the state's ability to raise those revenues. All told, that is about 25 percent of the state's general fund. In comparison, the state's previous worst shortfall during the 2001 recession was only 10.8 percent. Fierce cuts to public spending were widely anticipated.

"We've never had a shortfall of that size in our state," says Meg Gray Wiehe, public-policy analyst for the North Carolina Justice Center. "But the cuts could have been much, much worse than what ultimately ended up happening."

That's because North Carolina's Democrat- controlled Legislature decided against getting slash-happy. Instead it balanced the budget through three roughly equal measures: stimulus funds, cuts (Medicaid reimbursement rates and classroom size for fourth-grade through 12th-grade both suffered), and a temporary tax package.

The temporary taxes are spread widely across the population. Progressive measures are included, namely a 3 percent surtax on corporate income, a 2 percent surcharge on individual incomes of $100,000 to $250,000, and a 3 percent surtax on $250,000 or more. A regressive item was included, too: The sales tax was increased by 1 percentage point, a cost which falls disproportionately on low-income Carolinians.

Beyond the immediate crisis, the temporary tax increases have opened up the political space for a broader reform of North Carolina's tax system, which relies on taxes that weigh heaviest on the poor. The budget includes language requiring the financial committees of both houses to meet during the off session to come up with recommendations for reforming the state's outmoded tax system, which largely dates back to the 1930s.

"It's a conversation we've been having for 50 years," Wiehe says. "Now more than ever the political will to change it seems to be there." -- Jake Blumgart

Indiana's fiscal crisis was slow to boil over. While five years ago the state was facing near bankruptcy, in July 2009 it passed a budget increasing K-12 educational spending while preserving a $1.3 billion surplus. There were no state employee layoffs, and in September, Gov. Mitch Daniels took to The Wall Street Journal to boast of his state's relative solvency.

Yet even then, taxes were falling below revenue projections. Every month since the middle of 2008, tax receipts fell short of expectations. In early December, Daniels announced a $150 million decrease in higher-education funding. He froze state-worker salaries and turned down a $9,000 raise, continuing to earn a comparatively modest $95,000 a year. Thirty-three workers were laid off that month. Daniels called upon state agencies to cut spending more than once in 2009, forcing them to operate on budgets that were 20 percent lower than in the previous fiscal year.

There was hope that the belt tightening, which was to save the state between $300 million and $400 million, would be sufficient. Instead the governor had to announce a $300 million cut in public-school funding after a December bipartisan audit revealed Indiana's revenue for fiscal years 2010 and 2011 would haul in nearly $1.85 billion less than previously predicted. Fortunately, the state has a rainy-day fund for just such circumstances.

As a backdrop to the fiscal situation, Indiana is one of the most economically unequal states in the nation. Nearly 19 percent of Hoosiers rely on some form of welfare, and the state's rich out-earn the poor by a margin of 7 to 1. While income representing the wealthiest fifth of the state has risen nearly 38 percent between 1987 and 2006, the lowest fifth witnessed a far more modest increase of 9 percent. -- Mikhail Zinshteyn

The Pew Center on the States ranks Arizona's budget woes as second only to California's. In the pre-bust era, when the state was flush with cash, lawmakers cut taxes and increased government spending. Now, hit hard by the housing bust (the state has one of the highest rates of foreclosures), Arizona is faced with a $2 billion deficit -- a shortfall that's expected to soar to $3.4 billion in the coming fiscal year. Aided by the state's supermajority requirement to pass tax increases, the doctrinaire Republicans who control the Legislature have left devastating cuts to social services and education as the only recourse.

Legislators and the governor have already slashed funding for K-12 education by $144 million and knocked out $155 million from the state's Department of Economic Security, but this barely makes a dent in the problem. Earlier in the year, Gov. Jan Brewer -- a moderate Republican -- vetoed proposed cuts in the hope of forcing the Legislature to pass a 1 percent sales-tax increase. But as the year came to a close and it became clear the Legislature wasn't going to budge, she looked at cutting costs elsewhere. Brewer is now asking the federal government to take over detaining undocumented immigrants and has proposed setting up a wait list for the state's Children's Health Insurance Program. The state is also playing with the idea of shortening the school week to four days.

"We face a state fiscal crisis of unparalleled dimension, one that is going to sweep over every single person ... as well as every business, every family, every Arizonan," Brewer says. With the state's political forces gridlocked, little hope remains of narrowing the scope of the impact. -- Gabriel Arana

New Jersey
Exacerbated by the national recession and collapse of nearby Wall Street, New Jersey has dealt with a soaring deficit and tax problems for years. By borrowing money to balance its budget, New Jersey accrued an extraordinary $44 billion debt. Payments on those bonds, in turn, have limited spending in the already-scant budgets. Republican administrations in the 1990s cut taxes and made the problem even worse. Lastly, spending is limited by a tax-rebate plan; half the current budget is dedicated to rebates, which are meant to offset sky-high property taxes.

This year, New Jersey racked up a budget shortfall of $4.3 billion, which is projected to hit $8.3 billion in 2010. Since October 2008, unemployment has shot up from 6 percent to 9.7 percent.

With state revenues decreasing and budget goals consistently unmet, New Jersey has made record budget cuts, slashing funding to localities and eliminating 2,000 state jobs. Without the stimulus money infused into the 2010 budget, education would have been cut by 12.2 percent ($1.4 billion), and health and senior services would have faced cuts up to 27.3 percent.

On Nov. 3, 2009, Gov. Jon Corzine became the first Democratic casualty of the economic crisis. "There are 48 governors glad they didn't run for re-election in 2009," says Jon Shure of the Center on Budget and Policy Priorities. "It was a climate tailor-made for a challenger." To make up for falling revenue, Corzine raised taxes rather than cut services; he lost to Republican challenger Chris Christie who promised to cut taxes and spending.

November's election threatens New Jersey's recovery. For years, the state has deferred payments to its pension fund; keeping the program solvent means diverting large funds from other forms of spending in the future. Without new revenue, the deficit will continue to take precedent over services. And Governor-elect Christie's promises to cut spending and taxes will further worsen the state's economic prospects. -- Pema Levy

In some ways, Colorado is luckier than its regional neighbors like Nevada and Arizona, states that bought into the housing bubble in a huge way and are now suffering accordingly. On the other hand, those states never had to deal with Colorado's 1992 Taxpayer Bill of Rights (TABOR) law, which forced state legislators to restrict spending increases to the rate of inflation and population growth and made them return revenues raised over that limit.

"We've seen significant reductions in rates of revenue collection [beginning] in the late 1990s and early 2000s, primarily because the TABOR law wouldn't allow the state to save or invest," says Carol Hedges, senior fiscal analyst for the Colorado Fiscal Policy Institute. "We went into the recession with some of the lowest rates of tax collection and public revenue available for public investment, of any state in the country."

Thirteen years of TABOR (which was put on hold in 2005) have ensured emaciated state budgets. These severely constrained circumstances made it particularly painful for lawmakers to trim the fat. Fiscal year 2009–2010 required $1.5 billion in "budget-balancing decisions" from Gov. Bill Ritter, a Democrat. He paid for what he could with stimulus funds. The rest was made up of cuts from Medicaid, higher education, food stamps, and most other state programs. Now with fiscal year 2010–2011 looming, Ritter has proposed an additional $1 billion in cuts, and it looks like the school system will have to absorb most of it.

"K through 12 seems like the only option left as we move into the 2010–2011 cycle," Hedges says.

The only bright side is that these grievous wounds to state services could further discredit TABOR in the eyes of Coloradan voters, possibly spurring them to extend the legislative sanctions passed against the law in 2005. Hedges expects TABOR reform to emerge on the ballot as soon as 2011. -- J.B.

Nevada's deficit may not be as large as its neighbors to the east and west, but given the state's reliance on gambling and tourism revenue, which have declined sharply with the economy, the $1.2 billion shortfall for fiscal year 2010 will be tough to close. But state legislators on both sides of the aisle have shown a remarkable ability to work together: A mixture of cost-cutting and tax increases have already shrunk the budget deficit from $3 billion to $64 million -- and Republicans in the Legislature seem open to straying from the party line.

Unlike Arizona, Nevada's government isn't controlled by hard-line Republicans; the House has a solid Democratic majority, and Republicans have shown themselves to be amenable to increasing taxes. In May, legislators in the House and Senate prevented an all-out budget crisis by overriding the governor's veto of a $781 million sales-tax increase. The plan, however, also included a $1 billion reduction in funding for social services -- and included a salary cut for government workers.

To deal with the rest, Gov. Jim Gibbons continues his one-sided approach. He has asked state agencies, public schools, and universities to prepare for budget reductions as large as 10 percent. But there are less ascetic solutions. Nevada could revise its regressive tax structure, in which the top 1 percent of the population contributes 1.8 percent of its income to the state budget and the bottom 20 percent pays 9 percent.

The state could also borrow money from municipalities -- a $160 million stopgap -- that could keep the state afloat until the economy recovers. -- G.A.

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