Governor Douglas addresses congressional committee about fiscal conditions of states

first_imgVermont Governor Jim Douglas, chairman of the National Governors Association, testified today before the Commercial and Administrative Law Subcommittee of the House Judiciary Committee.  The hearing, titled State Taxation: The Impact of Congressional Legislation on State and Local Government Revenues, focused on the impact of federal actions on state and local taxing and spending decisions. Douglas told the panel that, unlike the federal government, states need to balance their budgets. To that goal, congressional attempts to stimulate the economy must keep in mind that the states will play a vital role in the recovery effort and that Congress must first “do no harm.” Douglas went on to say that the states as a whole saw a 7.5 percent drop in revenues in the last fiscal year. And even though the downturn started in late 2007, the negative cumulative effect on state budgets will continue through 2010 and 2011.”What these budgets show,” Douglas told the committee, “is that from a state fiscal standpoint, the worst is yet to come.”Governor Douglas’ Remarks:Testimony of Vermont Governor Jim DouglasChair, National Governors AssociationBefore the House Judiciary CommitteeSubcommittee on Commercial and Administrative LawU.S. House of RepresentativesState Taxation: The Impact of Congressional Legislation on State and LocalGovernment RevenuesApril 15, 2010Chairman Cohen, Ranking Member Franks, and members of the Subcommittee, thankyou for inviting me to testify today. On behalf of the nation’s governors and theresidents of my home state of Vermont, I appreciate you holding this hearing to explorethe fiscal condition of states and the effect Congressional action can have on our fiscalhealth.The bottom line is this: decisions about state revenue systems and state taxation shouldbe made by elected officials in the states. This principle is particularly important now asstates are working to emerge from a recession that has reduced state revenues to pre-2006 levels. Unlike the federal government, states must balance their budgets. Thisrequires states to make up for lost or decreased revenues by either cutting services andspending or raising revenues. Both actions, cutting services or raising taxes, can slowrecovery. As this committee, and Congress as a whole, considers legislation to spur theeconomy, create jobs or promote competitiveness, it should do so with an eye towardsthe critical role states play in promoting recovery. More specifically, legislation thatwould impact state taxes or taxing authority should adhere to the principles of “do noharm,” preserve flexibility, be clear and find the win-win so that states may continue tomanage their fiscal futures.Fiscal Condition of StatesThe fiscal condition of states started deteriorating rapidly when the recession began atthe end of 2007. In fact, repeatedly since the downturn started, states have had tolower revenue projections and make spending adjustments to meet balanced budgetrequirements. Governors in most states are in the process of finalizing or have justcompleted their budgets for fiscal year 2011, and in some cases 2012. What thesebudgets show is that from a state fiscal standpoint, the worst is yet to come.Previous downturns have demonstrated that the worst budget years for a state are thetwo years immediately after the national recession is declared over. This lag occursbecause state revenues continue to decline and state expenditures for safety netprograms continue to rise until after unemployment levels peak. However, unlike therecession earlier this decade, states’ recovery from the current recession may be prolonged,with most economists projecting a slow and potentially jobless nationalrecovery. Moreover, even when recovery begins, states will continue to strugglebecause they will need to replenish retiree pension and health care trust funds andfinance maintenance, technology, and infrastructure investments that were deferredduring the crisis. They will also need to rebuild contingency or rainy day funds and bothimplement and eventually pay a portion of the Medicaid expansion under national healthcare reform. Taken together, these facts mean that many states will not fully recoverfrom this recession until much later this decade.The Current Situation – The recent national economic downturn started in December2007 and likely ended around September 2009, making it the deepest and longestdownturn since the Great Depression. The slowdown directly affected state taxcollections, which according to the Rockefeller Institute declined for five consecutivequarters beginning in the last quarter of calendar year 2008 and extending through all of2009, with reductions of 3.9, 11.6, 16.4, 10.9 and 4.1 percent respectively. Thesefindings are consistent with the NGA/NASBO Fiscal Survey of States estimate that staterevenues declined 7.5 percent in fiscal year (FY) 2009, which for most states endedJune 30, 2009.Similarly, Medicaid spending, which accounts for about 22 percent of state budgets,averaged 7.9 percent growth in FY 2009, its highest rate since the end of the lastdownturn six years ago. Medicaid enrollment is also spiking, with projected growth of6.6 percent in FY 2010 compared with 5.4 percent in 2009.What these falling revenues and increasing expenditures create are budget gaps –holes in state budgets that must be reconciled to meet balanced budget requirements.The Fiscal Survey of States shows states closed budget gaps of $72.7 billion in FY2009 and $89.8 billion in FY 2010. This includes tax and fee increases of $23.9 billion in2010. Even with cuts and tax increases, states continue to experience new budgetshortfalls including more than $18.9 billion remaining for FY 2010, $55 billion projectedfor 2011 and $61 billion projected for 2012. All told, the combined remaining budgetgaps that must be filled for 2010 through 2012 equal $136 billion.For fiscal year 2011, Vermont faces a shortfall of approximately $154 million – roughly14% out of a General Fund budget of approximately $1.1 billion. In just over a year,more than 10,000 jobs have been lost and last year median family income fell nearly$2,000 from the year before. Although Vermont’s unemployment rate is among thelowest in the nation, our workforce is shrinking and too many are underemployed. As aresult, state revenues are $20 million below 2006 levels and a staggering $100 millionbelow where they were at the height of the economic bubble in 2008.While Vermonters have found it harder to pay the bills, our General Fund programshave seen unsustainable increases and new pressures. Demand for human serviceswill grow by $50 million, pension contributions are projected to increase by $29 million,and $75 million in federal recovery funds relied on for this year will no longer beavailable. With revenues not expected to return to pre-recession levels until 2013, ourfiscal crisis extends far beyond today. Without sustainable reductions, the fiscal 2012shortfall will balloon to over a quarter billion dollars – more than we spend on economicdevelopment, environmental protection, public safety, and higher education combined.Governors are making and have already made tough but necessary decisions toaddress these daunting challenges, including streamlining services, cutting programs,and reducing the state workforce. In Vermont, we are getting close to the end of ourlegislative session and we’re debating controversial but necessary proposals such asalternatives to incarceration for non-violent offenders, and I’m fighting hard to resistlegislative proposals to increase taxes on struggling manufacturers.The American Recovery and Reinvestment Act (ARRA) – State fiscal conditions wouldhave been worse if not for the passage of ARRA. Of the $787 billion in ARRA funds,about $246 billion came to or through states in more than 40 programs. Most important,the $87 billion in Medicaid funds and the $48 billion in state stabilization funds wereflexible and allowed states to offset some planned budget cuts and tax increases.Specifically, the Medicaid funds allowed states greater flexibility to manage state fundsallocated for Medicaid while the stabilization funds targeted help for elementary,secondary, and higher education, which represents about one-third of state spending.Without these funds, state budget cuts and tax increases would have been much moredraconian. In fact, given the ongoing fiscal problems in states, 47 governors recentlysigned a letter supporting a two-quarter extension of ARRA’s enhanced FMAP funding.Such an extension would help states avoid some cuts or tax increases that wouldotherwise be necessary to balance 2011 budgets.My own state of Vermont has received more $700 million dollars in Recovery Actdollars; $500 million of which was paid out before December 31, 2009 and helpedsupport more than 2,000 jobs.The Recovery Period – While there is still uncertainty regarding the shape of therecovery, there is a growing consensus that it will be slow. Numerous studies projectthat state revenues will likely not recover until 2014 or 2015. A recent forecast by MarkZandi at Economy.com showed that the national unemployment rate, which straddled5.5 percent during 2001–2007, will not attain that level again until 2014. Similarly,Zandi’s latest forecast indicated that state revenues will not return to the 2008 level inreal terms until FY 2013.Deferred Investments – Even when recovery begins in the 2014–2015 period, states willbe faced with a huge “over-hang” in needs and will have to accelerate payments intotheir retiree pension and health care trust funds, as well as fund deferred maintenanceand technology and infrastructure investments. They will also have to rebuildcontingency or rainy day funds. All of these needs were postponed or deferred duringthe 2009–2011 period and will have to be made up toward the end of the decade.According to a 2007 Pew Center on the States report, states have an outstandingliability of about $2.73 trillion in employee retirement, health, and other benefits comingdue over the next several decades, of which more than $1 trillion is unfunded.What all of this means is states will continue to struggle over the rest of this decadebecause of the combination of the length and depth of this economic downturn, theprojected slow recovery, and the additional Medicaid responsibilities. Even after statesbegin to see the light, they will face the “over-hang” of unmet needs accumulated during the downturn.With states having entered the recession in 2008, revenue shortfallspersisting into 2014, and a need to backfill deferred investments into core statefunctions, states will need maximum flexibility to manage their fiscal systems in order tofully emerge from the current recession.Principles for federal legislation related to state taxationGovernors believe federal action should favor the preservation of state sovereigntywhen legislating or regulating activity in the states. This is particularly true when itcomes to actions that affect the ability of states to manage their revenue systems. Theindependent ability of states to develop and manage their own revenue systems is abasic tenet of our federal system. Therefore, the federal government should avoidlegislation and regulations that would serve to preempt or prohibit, either directly orindirectly, sources of state revenues or state taxation methods that are otherwiseconstitutional.Since adoption of the U.S. Constitution, Congress has generally respected statesovereignty with regard to state taxes. Unfortunately, that trend has begun to changeover the last few years as Congress has increasingly restricted the rights of states todetermine their own tax structure. Recent legislative examples include the moratoriumon the taxation of charges for Internet access, prohibiting the taxation of nonresidentpension income, and the accelerated elimination of the state estate tax credit.As this committee considers whether to take up legislation related to state taxation,governors encourage the committee to review all proposals in light of the followingprinciples:• Do no harm: Legislation dealing with state taxing authority should notdisproportionately reduce existing state revenues. This principle is especiallyimportant at a time when states are cutting core services to meet balancedbudget requirements. Federal unfunded mandates or limits on state authority willonly exacerbate the fiscal problems states currently face.• Preserve flexibility: The fiscal crisis is forcing all governors and states to askfundamental questions about the role of government. These questions will leadto changes at the state level that could have long-term, positive effects on thedelivery of services, modernizing revenue systems and holding governmentaccountable. States should not be hindered in their pursuit of these reforms byfederal legislation that restricts a states authority to act.• Be clear: Federal legislation, especially in the context of state taxation, should beclear to limit ambiguity or the need for expensive and time-consuming legislation.• Find the win-win: The goal of all legislation should be to find a balance thatimproves the standing of all stakeholders. Especially in times such as thesewhere states are struggling with unprecedented budget gaps, Congress shouldonly consider legislation related to state taxation or state taxing authority that isbeneficial to all stakeholders.Conclusion:Congress, through its authority under the Commerce Clause of the U.S. Constitution,has broad authority to regulate state taxation. The key questions are when and howshould that authority be used. Governors believe that the ability of states to developand manage their fiscal systems is a core element of sovereignty – one that should notbe interfered with unless absolutely necessary to preserve interstate commerce. Thecurrent fiscal condition of states underscores this basic principle and should heightenCongressional consideration of the impact proposed legislation could have on states.Thank you for the opportunity to testify before you today. On behalf of my fellowgovernors, I look forward to working with you and would be happy to take anyquestions.Source: Douglas’ office. 4.15.2010last_img

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