Pending Train Wreck: Trump’s Budget and Healthcare Cuts on Top of Widespread State Fiscal Crises

What’s been happening in our statehouses over the past few weeks may help us picture the train wreck that looms if President Trump’s proposed budget, and/or the repeal-and-replace or total repeal of the Affordable Care Act should be enacted by Congress. We were warned several weeks ago in a report from the Center on Budget and Policy Priorities that these proposals being considered by Congress make outlandish assumptions about the fiscal capacity of state governments. But only in the past couple of weeks, during rancorous state budget debates that preceded the end of Fiscal Year 2017, have the ugly details about the condition of state budgets been explored in detail by the press.

Thirty years ago Grover Norquist of Americans for Tax Reform began demanding that state legislators and members of Congress sign his pledge never to raise taxes. Wikipedia explains: “Prior to the November 2012 election, the pledge was signed by 95% of all Republican members of Congress and all but one of the candidates running for the 2012 Republican presidential nomination.^”  In the past month, however, state legislators have been begun to break their promise to Grover Norquist as despairing constituents have demanded tax increases to preserve essential services and protect their state economies.

Here is the warning from the Center on Budget and Policy Priorities about the danger of Trump’s and Congress’s assumption that states can absorb the impact of massive tax slashing by the federal government: “The reality… is that states lack the wherewithal to replace the magnitude of funds they would lose under the budget. States operate under balanced budget requirements, and most states are already struggling to balance their current budgets, even before any federal cost shifts. Recent state revenue growth has been weaker than expected, leaving 28 states with budget shortfalls this fiscal year… Most of these states have responded by cutting services, using reserves, and taking other steps to balance their budgets…. More than half the states lack the revenue needed to maintain services at existing levels in 2018.”

In June in Topeka, Kansas and then last Thursday night in Springfield, Illinois, legislators overrode vetoes by Republican governors and raised taxes.  Both states raised taxes in the midst of catastrophic fiscal crises. Illinois had not passed a state budget since Governor Bruce Rauner took office. It is one thing to read the dry analysis from the Center on Budget and Policy Priorities. And you usually wouldn’t turn to the Wall Street Journal for heart-rending details about the pain in people’s lives, but here is the tragedy that newspaper’s reporters Shibana Mahtani and Douglas Belkin depicted on June 27 from Illinois as the legislature wrangled: “Hospitals, doctors and dentists don’t get paid for hundreds of millions of dollars of patient care. Social-service agencies help fewer people. Public universities and the towns that surround them suffer. The state’s bond rating falls to near junk status. People move out… The unpaid backlog is now $14.6 billion and growing. Illinois is even late paying its utility bills to Springfield, its own capital city… Susana Mendoza, the state’s Democratic comptroller, is in charge of doling out limited funds to organizations demanding payment—a job she likens to handing out crumbs to starving children… Peoria-based OSF Healthcare a network with 10 Illinois hospitals, is owed about $115 million for bills over four months old…. The state owes Illinois dentists $225 million, and some of those bills go back 23 months… Over the past two years, Eastern Illinois University has received at least $53 million less than it would have if the average funding levels of the prior five years had held. Professors in the chemistry department haven’t been able to print in color since the department’s printer ran out of yellow ink a year ago. Biochemistry professor Mary Konkle says she decided to leave her tenured position when she no longer had funding to order equipment or chemicals for her research.”

Illinois Governor Bruce Rauner had agreed to a tax hike, but he wanted it to be only temporary and he wanted to have a four-year property tax freeze to go along with it. But legislators didn’t even give him these concessions as they raised taxes.  Here is Natasha Korecki for POLITICO: “In an extraordinary rebuke to GOP Gov. Bruce Rauner, a group of Illinois House Republicans joined the Democratic majority to override the governor’s veto of a $36 billion budget.  Thursday’s action ends a stalemate that has stretched two years, causing the state to build up a $15 billion backlog and teeter on the edge of an unprecedented ‘junk’ bond rating downgrade.  The passage means the state has a budget for the first time since 2015—when Rauner took office… the agreed-upon budget package increases the state personal income tax from 3.75 percent to 4.95 percent and the corporate income tax from 5.25 percent to 7 percent.”

But there is still trouble for public education, because a new school funding distribution formula hasn’t yet passed, and Illinois has been known as one of the nation’s most inequitable states in the way it fails to use state funds to make up for the vast disparities in local property taxing capacity in poor and wealthy school districts. Here is Chicago Sun-Times reporter Lauren FitzPatrick explaining the meaning of the new budget for school funding: “Wait, what? Weren’t the budget bills supposed to fix everyone’s money problems?  Not quite. School spending is separate, though connected. The measures House members approved on Thursday do authorize more spending for schools—about $350 million more throughout the state with one of the most inequitable school funding systems in the nation—but don’t include the new funding formula for doling out that money.  That formula… is spelled out in  separate legislation, including one bill, Senate Bill 1, that has passed both houses of the Legislature but has been targeted for veto by Rauner once it lands on his desk… The budget bills would raise new tax revenue—which the Illinois Comptroller’s office said would allow it to cut checks for a remaining $850 million in late block grant payments to Chicago Public Schools and other districts across the state—but there’s no immediate cash infusion…. Meanwhile on Thursday, the credit ratings agency Moody’s also threatened to further downgrade Chicago Public Schools’ already shoddy rating, citing the state’s ‘uncertain’ timeframe in sending that money to its largest school district.”

Then there is a short new report on the school funding mess in, of all places, Washington state, where a long-running school funding lawsuit awaits a remedy. The reporter, Hanna Brooks Olsen describes, “the basic issue with Washington’s inability to fund schools—and the biggest sticking point in the legislature. With no income tax, a plethora of tax exemptions for the state’s many mammoth companies (Amazon, Boeing, Microsoft, plus several in biomed), and a business tax that’s basically flat, Washington’s revenue has been cascading over the last several decades, despite the state’s impressive growth. Since the 1970s, Washington’s tax revenue has fallen 30% as a portion of state income; meanwhile, Seattle, the state’s biggest economic driver, adds close to 1,000 new residents every week. And those 13 billionaires living nearly tax-free—among them, Amazon’s Jeff Bezos and Microsoft’s Bill Gates—boast a net worth totaling $180.3 billion.  Meanwhile, Washingtonians pay ‘the fifth highest combined sales tax in the country.’  The result is the ‘most regressive tax system’ in the United States.  Washington’s poorer residents pay a larger portion of their income than those huge earners, and it’s a less balanced ratio than if they lived anywhere else.”

The Washington Post‘s Emma Brown and Sandhya Somashekhar add that in the budget just passed, “Lawmakers in Washington state narrowly averted a government shutdown after coming to a last-minute agreement to raise property taxes, a move meant to help the state fulfill a court order to invest more in its public schools.”

Brown and Somashekhar paint a bleak picture as they summarize budget trouble from Illinois and Kansas to New Jersey, Washington state, Alaska, Louisiana, Oklahoma, Connecticut, Arizona, California, Minnesota, and Mississippi: “Since 2011, 11 states have enacted large tax cuts meant to be phased in over a period of years… Phasing in tax cuts aims to ease their impact. But critics say that states often fail to plan for the resultant decline in revenue and that lawmakers are shielded from accountability when the full consequences of their votes won’t be felt for years.”

It would appear that some of the effects of those “back-loaded” tax cuts are now being felt in many places. And if Congress enacts Trump’s budget and reduces federal funding for Medicaid and other health programs—pushing what are now federal responsibilities off onto the states—more states will begin to face the sort of crisis that has caused legislators in Kansas and Illinois to forget they signed Grover Norquist’s pledge.

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