States to residents, localities: forget promises to restore funding

Because of the size of the budget cuts over the last three years, many advocated for states to restore — or “backfill” — funding to programs that had been cut.

“Most states haven’t backfilled the cuts they made to education, state services and local governments,” said Elizabeth McNichol, a senior fellow at the Center on Budget and Policy Priorities, a think tank in Washington. “People are still hurting. States should look at rising revenue as an opportunity to give them some relief.”

Additionally, several experts pointed out that, while sales and income tax revenues are rising, property tax revenues have not yet begun to recover. Property tax revenues are the largest source of funding for most local governments, and school districts depend heavily on those revenues, as well.

Because the property values are generally not assessed every year, property tax revenues continued to rise even as property values crashed around the country in 2008. As assessments began to reflect those declining values, however, property tax revenues started to decline. Total property tax collections by state and local governments fell by more than $2 billion from 2010 to 2011, according to the Census Bureau, and experts believe that is only the start. (See sidebar.)

Lucy Dadayan, a senior policy analyst at the Rockefeller Institute of Government, which analyzes trends in state and local revenues, said that while states may be beginning to recover, local governments and school districts may not yet have hit bottom.

“Because it takes states three to five years to do full reassessments, I expect property tax revenues to continue to fall well into 2013,” she said. “That may mean even further budget cuts at the local level next year.” (See chart showing year-over-year changes to the revenue of cities from 2004 through 2011.)

Most local governments also receive a significant portion of their funding from their states: nationally, state aid makes up about a third of local government revenues. But according to a report released last week by the Pew Charitable Trusts’ American Cities Project, from 2009 to 2010, state aid to local governments was cut in the vast majority of states. That decline marked the first time since 1980 that state aid and property tax revenue fell simultaneously, according to Pew.

It appears as though those lost funds have not been restored in most states, even as demand for services in local governments continue to rise. That disjunction has led many experts to advocate for states to increase funding to their towns, cities, and counties to help fill the revenue gap in the coming year.

But instead of either restoring cuts in state services or increasing aid to local governments and school districts, several state legislatures are choosing to use their surpluses to cut taxes. Besides Kansas, at least seven other states have passed bills that cut taxes and reduce revenue in future years, and several more are still considering doing so.

“We have these three factors: huge state budget cuts in recent years, property tax revenues just starting now to show a decline, and state lawmakers seeming to respond to this by passing tax cuts,” said Matthew Gardner, the executive director of the liberal-leaning Institute on Taxation and Economic Policy, which tracks state and local tax policy. “If you’re looking at those three developments and asking yourself how they can all make sense together, the short answer is that they can’t.”

Kim Rueben, a public finance economist with the Tax Policy Center, agreed.

“States with a little money to play with have a huge number of worthy ways to use it,” she said. “That they are choosing to cut taxes makes you wonder if they even have any kind of long-term plan.”

Other priorities

The states that have already passed tax cuts, or have proposals to do so pending, range from Arizona to Michigan, Maine to New Jersey, and Nebraska to South Carolina. The nature of the tax cuts varies, as well. Some will have a relatively small fiscal impact, while others will significantly affect the state budget outlook for many years to come.

But in every state, critics were quick to identify other critical spending priorities that the legislature has subordinated to cutting taxes.

Restoring funding to education was the first priority for many. Indeed, tax cuts were proposed in several of the states that have cut education funding the most during the last three years.

South Carolina, which will have a surplus this year of nearly $1 billion, has cut K-12 education funding by over 24 percent since 2008, the most of any state. The legislature has proposed several tax cuts this year, including one that would reduce the income tax rate on small businesses by five-tenths of a percentage point each year for four years, ultimately bringing the rate from five percent to three percent, at a loss of $65 million a year. Another bill, which Governor Nikki Haley has pushed, would consolidate some personal income tax brackets, reducing revenue by a further $78 million.

 “I don’t understand how anyone could argue that this a good time for a tax cut,” said Democratic state representative Seth Whipper. “After all the money that we’ve taken away from schools, furloughing teachers, deferring repairs, what sense does it make to give some people $50 in tax cuts?”

“Education was very underfunded before the recession in this state,” said Holley Ulbrich, a distinguished scholar at the Strom Thurmond Institute of Government and Public Affairs at Clemson University in South Carolina who has long studied the state’s education policy. “Now, we’re at the level we were at in the nineties. And that’s because every time there’s an increase in revenue, rather than catch up on where we’ve fallen behind, the state wants to give it back” in the form of tax cuts.