PSN 2011 Tax and Budget Roundup: Middle Class Reels From Extreme Cuts, Damaging Right-Wing Fiscal Priorities

(Note: With legislative sessions largely adjourned in statehouses across the nation, this week’s Dispatch is the second in a series of issue-specific session roundups from Progressive States Network highlighting trends in different critical policy areas across the fifty states.)

Lawmakers confronted massive budget shortfalls, persistently high unemployment, and myriad fiscal and economic obstacles during 2011 state legislative sessions. With states still reeling from effects of the economic downturn and with federal investment in state economies receding, lawmakers considered drastic measures to confront budgetary constraints. Though many state revenue outlooks improved slightly in the past few months, partly as a result of tax increases passed in recent years, it was little comfort as states faced collective shortfalls of $103 billion in fiscal year 2012.

42 States Have Faced Budget Shortfalls in FY12- CBPP

Source:Center on Budget and Policy Priorities

The shift in the state electoral balance last November also changed legislative dynamics, as conservatives won many majorities and gained new control of over 20 legislative chambers. The right's voracious appetite for cuts that harmed the economic security of the middle class played out dramatically throughout sessions this year, as they pushed extreme fiscal austerity measures including unfeasible, regressive, and economically-damaging budget cuts, while also pushing for enormous tax breaks for the rich and large businesses. Hyperpartisanship further compromised fiscal negotiations in statehouses across the country, with several states failing to produce a budget on time and Minnesota shutting down after the state officials failed to agree to a budget deal.

The Pew Center on the States notes that although revenue generation has been a significant feature of states' response to revenue shortfalls in previous years, cuts to vital services and reductions in public workforces unfortunately comprised a disproportionate amount of state-level fiscal action in 2011. As Susan K. Urahn, Managing Director at Pew, summarized the session, "two years ago there was a historic increase in taxes. This year it was, what can we cut and how deeply do we cut — a pretty significant shift."

As sessions progressed, it became painfully apparent that conservative lawmakers were not interested in job creation, economic growth, or support for those who have been hit hardest by the recession, but rather ideologically-driven platforms that sacrificed fiscal sustainability and the economic security of millions of families for the benefit of the affluent and huge corporations. A conservative lawmaker from Florida confirmed as much when reflecting on his state’s 2011 session as “certainly” not resulting in “the 'jobs, jobs, jobs' that the public expected,” adding that “if we added everything up, we're probably in the negative this session for jobs, not the positive."

The right's fiscally and socially irresponsible approaches this session were as alarming as they were hypocritical, exacerbating economic pain and as North Carolina Gov. Bev Purdue recently commented, causing "generational damage."

Party Control of State Legislatures - NCSL

Source: National Council of State Legislatures

In a recent piece, New York Times columnist Charles Blow aptly described the ways in which the right wing has been able to frame their damaging fiscal and social policy priorities to the public:

"This is part of the modern doctrine of a compassion-free conservatism that’s using the fog of the fiscal crisis to push a program of perverse wealth inequality as sound economic policy: The only way to jump-start the economy is to slash taxes on the wealthy and on companies; the only way to compensate for the deficits that those tax cuts exacerbate is to slash benefits to the poor and vulnerable. It would be comical if it weren’t so callous. Not only is this faulty logic, it’s a false choice."

Recent developments at the state and federal level illustrate a persistent dichotomy between economic forecasts fiscal policy and the daily experience of middle and low-income families. As national reports indicate positive signs of an economic rebound and national leaders have largely pivoted to budget cuts and deficit reduction rather than pursuing comprehensive job creation strategies, unemployment still remains abysmally high. Unemployment figures released in June marked the eighth consecutive month of job loss in the state and local government sector, with the national rate rising above 9 percent. Over 14 million Americans are now out of work and, as the Center on Budget and Policy Priorities (CBPP) points out, “in May 2011, the labor force participation rate remained at its lowest level since April 1984 and the percentage of the population with a job remained near lows that were last seen in the 1980s.” Over 45 percent of the unemployed have been looking for employment for 27 weeks or more.

At the same time, corporations have enjoyed historic profits and absurdly low tax burdens. At the end of March, the New York Times published an explosive story finding that General Electric (G.E.), the nation's largest company which reported $5.1 billion in profit last year from operations in the U.S., would not pay a dime in federal taxes. Similarly, ExxonMobil posted profits exceeding $45 billion last year, even as they paid no federal income tax in 2009 as a result of aggressive tax avoidance strategies. In a 2008 report, the Government Accountability Office discovered that two out of every three U.S. corporations paid no federal income taxes from 1998 through 2005. Just as disturbing, Northeastern University economists found that from June 2009 to May 2011, corporate profits represented 88 percent of the growth in real national income and average earnings for all employees actually declined by 1.1 percent over the same time period. As income inequality, joblessness, and the economic insecurity of the middle class has exacerbated, corporations have been contributing less and less of their fair share in taxes.

Massive Cuts to Education and Health Care Contribute to Job Losses

Utilizing precarious economic and fiscal circumstances, newly-empowered conservatives pursued a damaging agenda in state legislatures this year.  The brunt of the cuts fell on the backs of nurses, teachers, firefighters, and vulnerable populations. Conservatives proved they were willing to compromise economic recovery, job growth, public safety, and the needs of children and the elderly all with an eye toward enriching the already affluent and reducing government support for an ailing economy.

Education funding was one of the biggest targets of right-wing budget cuts this session. Stateline reported that "in many states, this was the second or third or fourth year of budget cuts since the recession began” and that “governors have proposed a net $2.5 billion in cuts to K-12 education and $5 billion in cuts to higher education" for fiscal year 2012.

Almost three-quarters of states that enacted budgets have opted for enormous reductions to education, health care, services for the elderly, and the state workforce generally. In a recent analysis, CBPP analyzed some of the most egregious actions states have enacted this past year:

  • Arizona eliminated Medicaid coverage for 130,000 adults without children and canceled a child care assistance program for working families.
  • Florida's budget made significant reductions to the state workforce, forcing 1,300 public employees. The state is also reducing Medicaid payments to hospitals and cutting 15,000 children from a academic preparation program that assists low-income families.
  • Michigan made huge cuts to K-12 education, while additionally reducing support for working families in a time of hardship. The state approved a 70 percent reduction the state's Earned Income Tax Credit (EITC) program and limiting assistance for people with disabilities.
  • Wisconsinis reducing the state’s EITC for over 150,000 families.

Further, state workforces are shrinking dramatically. Since August 2008, over half a million state employees have lost employment — compromising the economic security of working families and overall recovery.

State and Local Government Payrolls are Shrinking - CBPP

Source: Center on Budget and Policy Priorities

States Pursuing Reductions to Important Public Structures, while Increasing Support for Corporations and the Rich

Even as some states cut programs that benefit the middle class and working families this year, many of the same states increased support for corporations and the rich.

In Florida, legislators approved an extreme measure that not only undermines the economic security of Floridians, but also threatens recovery in a state already deeply affected by the lasting impacts of the recession with the third highest unemployment rate in the nation. State lawmakers approved legislation that would make Florida the only state in the country that ties unemployment insurance (UI) to the state's unemployment rate. The bill will also make the process for qualifying for UI even more stringent and reduce the tax rate that companies are required pay to cover the benefits by 10 percent. While undermining jobless workers and families, the bill would also cut business taxes in a state that already inefficiently directs hundreds of millions in taxpayer dollars to corporate tax breaks and subsidies. Other states, such as Arizona, Georgia, Idaho Indiana, Maine, Michigan, Nevada, and Wisconsin, followed a similar path by cutting taxes on the rich and corporations. In one of the most extreme moves, Missouri plans to phase out its corporate franchise tax over the next five years.

To compound the largely regressive policies enacted this session, lawmakers have looked further toward privatization.Wisconsin Governor Scott Walker signed legislation earlier this year to replace the state's Commerce Department with a public-private entity. Several conservative officials have floated this flawed concept as a means to increase efficiency, but the effort to privatize economic development functions in the state comes at a great cost to taxpayers. As Good Jobs First comprehensively details, “rather than making economic development activities more effective, privatization is often little more than a power grab by governors and politically connected business interests” — a power grab that can lead to misuse of taxpayer dollars, corruption, conflicts of interest, and lost accountability. For instance, Michigan, a state that has a semi-privatized commerce department, distributed $9.1 million in tax credits to a convicted embezzler last year. Generally, privatization comes at the expense of long-term community investments, sustainable budget policy, taxpayer protections, transparency, and public accountability. Privatization efforts often reflect a desire for a short-term infusion of capital and result in policy driven by profit rather than public interest, potential conflicts of interests, and higher future costs and fees for state residents.

Economic Research Indicates the Detrimental Impact of Cuts

Contrary to flawed right-wing fiscal ideology, research has shown that cuts to major programs are socially and fiscally detrimental, especially in a time of economic pressures. A recent Center for American Progress (CAP) study indicates that states that have made the largest reductions to spending have also lost the most jobs: "states that cut spending saw on average: 1 percentage point increase in the unemployment rate, 2.1 percent loss of private employment; 2.9 percent real economic contraction relative to the national economic trend."

Bigger state spending cuts, bigger employment losses - CAP-1

Source: Center for American Progress

Cuts are extremely damaging to the economy. Further reductions will diminish state workforces, decrease spending on crucial programs, curb economic growth, and exacerbate the effects of the downturn. The Economic Policy Institute (EPI) details the danger of state budget cuts as they impact employment, economic activity, and investment in both the public and private sector:

"For each dollar of budget cuts, over half of the jobs and economic activity lost will be in the private sector, for a number of reasons: (1) a quarter of state spending is transfer payments, which predominantly serve to increase beneficiaries’ purchasing power for private spending; (2) state spending is often in the form of grants or contracts to private or nonprofit entities who are then responsible for the provision of public services, (3) nearly a third of direct state spending (i.e., public provision of goods and services) supports jobs in private supplier industries; and (4) workers who lose their jobs have less money to spend than they otherwise would, and their spending supports jobs across the economy."

They conclude that every $1 in state or local budget cut results in $1.41 in lost economic activity and 41 cents less re-spending in the private sector.

Targeted Revenue Generation to Invest in Public Structures and Respond to Shortfalls

Despite the overwhelming cuts that many legislatures enacted, there were a number of states that pursued some form of revenue generation to alleviate fiscal pressures. Further, many states saw significant victories that advanced the economic security of middle class.

At the beginning of the year, Illinois lawmakers approved legislation to raise the state corporate and personal income tax. In explaining the need for the effort, Gov. Pat Quinn explained that the state's "fiscal house was burning." Faced with a revenue shortfall of $15 billion, legislators garnered the political will to enact sensible means to generate sorely-needed revenue. Though the state faces a number of structural budget issues, compared to the short-term fiscal gimmicks used in the past, this action was undoubtedly a step in the right direction. The plan will raise $6.5 billion over the next year and primarily consists of temporarily increasing the state's flat personal income tax, from 3 to 5 percent, and corporate tax, from 4.8 to 7 percent. This was the first time in 22 years that the state raised income taxes.

Connecticut followed suit months later, when the state legislature took a solid step towards fiscal stability by approving a $40.1 billion budget that included progressive measures. The budget sought cost savings in several areas, but also generated billions in new revenue for the state by increasing the marginal income tax rate for joint filers earning $100,000 and over, lowering the threshold for the estate tax from estates valued at $3.5 million to $2 million, raising the hotel, alcohol, and tobacco taxes, and increasing the sales tax. Notably, the budget also creates a refundable state earned income tax credit for working families, funds pension obligations, and provides much-needed funding for critical services and programs. As the New York Times explained in an analysis at the time, "as officials in nearby states have become conspicuous converts to the current anti-tax, anti-government fever, [Governor] Malloy and Connecticut Democrats are striking a more anomalous course, betting that residents will accept the short-term pain of tax increases if they see a long-term gain of stable government services and fiscal policy."
Other states looked toward revenue generation as well:

  • Hawaii repealed a state income tax deduction for high-income tax payers;
  • Maryland increased the sales on alcohol to 9 percent;
  • Nevada temporarily extended business and state sales taxes that were set to expire this year; and
  • Vermont increased cigarette taxes by a 38-cents, enacted a new tax on medical and dental insurance claims, and raised a provider tax on home health agencies and nursing homes.

CBPP has documented that raising revenue is typical during recessions, noting that "in the recession of the early 1990s, some 44 states raised taxes; in the early 2000s, some 30 states did so." In 2008 and 2009, over 30 states increased taxes as a response to fiscal pressures. In 2009 alone, California, Connecticut, Colorado, Delaware,Hawaii, New Jersey, New York, North Carolina, Oregon, Rhode Island, Vermont, and Wisconsin instituted either a permanent or temporary reform of personal income taxes. Many of these states have increased revenue by over 5 percent. Last year, Hawaii and Oregon took progressive steps to close shortfalls. Oregon voters approved legislative action to increase personal and corporate income taxes, while Hawaii looked to cap itemize deductions at $50,000 for joint filers with income over $300,000, or at $25,000 for individuals earning over $150,000.

Other states have looked strategically to reforming corporate income taxes. In recent years,Wisconsin enacted combined reporting, which requires multi-state corporations to report profits from all entities, including subsidiaries, for tax purposes, and is a key policy to restrict tax avoidance and nullify certain tax shelters. Currently, over 20 states have implemented the policy.

During an economic downturn, progressive revenue generation is far preferable to deep cuts, as it allows states to provide funding for essential programs, pump money into the economy, protect working families, and preserve jobs. As Progressive States Network has highlighted in the past, research consistently shows that there is no link between tax increases and job loss or migration of wealthy residents. Moreover, states with higher personal income tax rates experienced significant job growth in the past decade, have more innovative new economy industries as a result of crucial investments in long-term growth industries, and sustain higher income growth.

Many states also looked to close inefficient corporate tax loopholes and wasteful tax credits this session. For instance, Washington lawmakers took a sensible step in deciding not to extend an inefficient film tax credit program that would have cost the state $7 million in the coming biennium.

As House Majority Leader Pat Sullivan explained, “having just passed a budget… that actually didn’t fund some of the programs that some of our members really wanted to see funded, it was difficult then, in turn, to turn around to adopt a tax break.” Film tax credit programs are notorious examples of wasteful and ineffective spending. In 2002, only three states offered incentives to the film industry; today, a majority do so. Nonetheless, in recent years, lawmakers and officials in several states, including Connecticut, Iowa, Michigan, Massachusetts, New Mexico, and Wisconsin, have looked to decrease or eliminate this type of tax credit due to issues of excessive cost, scandal, corruption, and lack of economic impact.

Progressives Championing Accountability to Protect Taxpayers

Progressive lawmakers also championed efforts in 2011 to augment accountability and transparency of state spending. In May, Oregon state lawmakers unanimously approved a bill to provide increased transparency of state spending on economic development subsidies. The legislation, HB2825, requires the Department of Administrative Services to publish detailed information regarding the amount, purpose, and intent of tax incentives directed to corporate entities on the state's transparency website. State Rep. Phil Barnhart (D), who sponsored the bill along with State Rep. Kim Thatcher (R), commented that “spending on tax breaks should be treated the same as spending on programs,” and that “by putting this information online, as is currently the case with other areas of the budget, we move one step closer to that goal."
The bill garnered bipartisan legislative support, approval from Oregon businesses, and brought together advocacy organizations from across the ideological spectrum. The primary champion of the legislation was the Oregon State Public Interest Research Group (OSPIRG), which was instrumental in moving the bill and framing transparency as a means to protect taxpayers and provide safeguards against waste. Jon Bartholomew, a Policy Advocate at OSPIRG, notes that the bill “will prevent fraud and waste of our public resources and ensure that Oregonians get the greatest return on our investment possible."
The victory in Oregon mirrored legislative movement across the states to increase transparency of state budgets.
In the 2011 session alone, lawmakers in several states, including Colorado, Hawaii, Maine, New Mexico, Vermont, Washington, and West Virginia, have spearheaded initiatives to augment accountability in the state budget process, evidence that policymakers are placing a greater level of scrutiny on corporate tax breaks, subsidies, and contracts as states continue to experience the lasting impacts of the economic downturn.

Earlier in the year, the energy company Evergreen Solar declared that it would close its Massachusetts-based operation and move to China — after the state doled out $58 million in tax incentives to the company. Lawmakers failed to include accountability requirements as terms of the subsidy and, as a result, 800 people found themselves out of work and the state will not be able to recoup the full amount of the subsidy. A similar instance occurred this year with Fidelity Investments, prompting legislators to act. Massachusetts State Sen. Jamie Eldridge (D) introduced S153 to strengthen the state's economic development subsidy accountability mechanisms.
The revenue pressures states confront merit a more detailed review of state spending. States direct hundreds of millions of dollars annually to corporations in the name of economic development, usually with little to no transparency, economic benefit, or job creation. As Good Jobs First documents in a recent publication, eliminating or reducing ineffective corporate subsidy programs can make a significant contribution towards addressing state revenue shortfalls.
Lawmakers must make sure that entities receiving public dollars are creating jobs, saving their state money, and best serving the public good. Dealing with continued shortfalls, states cannot afford to hand out enormous subsidies or award lavish contracts with nothing to show in return. Without needed accountability reforms, states are placing taxpayers, budget sustainability, and economic recovery at risk.

Conclusion: Rebuilding Prosperity

The results of 2011 legislative sessions demonstrate that the dire fiscal and economic circumstances states continue to confront require policy responses from lawmakers that will ensure states can continue provide essential services, make critical investments in long-term growth areas and public structures, support working and middle-class families who have been disproportionately hit by the impact of the downturn, and ensure that all taxpayers are contributing their fair share.

For an extensive review of progressive tax and budget policies, voters' attitudes, and messaging, please see PSN's Blueprint for Economic Security: Rebuilding Prosperity and Messaging for Government Action in an Economic Downturn.

Full Resources from this Article

PSN 2011 Tax and Budget Roundup: Middle Class Reels From Extreme Cuts, Damaging Right-Wing Fiscal Priorities

Center on Budget and Policy Priorities — States Continue to Feel Recession's Impact
Center on Budget and Policy Priorities — New Fiscal Year Brings Further Budget Cuts to Most States, Slowing Economic Recovery
Economic Policy Institute, Dire States
Economic Policy Institute — Ten facts about the recovery
Progressive States Network — Austerity vs. Progress — States balance budget with cuts, not taxes
Wall Street Journal — Higher Taxes Yield to Budget Cuts

This article is part of PSN's email newsletter, The Stateside Dispatch.
View other items from this edition