Posted on Friday, February 4, 2011
IN 2010 37 states held elections for governor. It is a wonder anyone wanted the job—most states were submerged in fiscal chaos. Now the messy task of governing begins. Pat Quinn, the governor of Illinois, was one of the few candidates who advocated raising taxes. This month he more than fulfilled his campaign promise. The personal income tax has jumped by a whopping 67%.
States have struggled during the recession, but 2011 may be the most difficult year yet. Easy cuts have already been made. The federal stimulus has given states nearly $200 billion over the past two years; by the end of this fiscal year, aid will all but dry up. Reserves are low: state rainy-day funds have about half as much cash as they did in fiscal 2006. Yet states are likely to face $140 billion in budget gaps by fiscal 2012, according to the Centre on Budget and Policy Priorities, a research outfit in Washington, DC. There is no simple way to close them.
Mr Quinn’s approach represents one extreme. The personal-income-tax increase, combined with a higher corporate tax, may delay disaster. The $13 billion deficit in Illinois amounts to about half its budget. But even with extra revenue, problems remain. Since 2009, when Mr Quinn replaced the ineffable Rod Blagojevich, Illinois has borrowed $7.3 billion to pay for its pension system, Medicaid costs and general expenses. The state will soon issue another $4.1 billion in bonds to meet its pension obligations, rather than reform the system. Meanwhile, the new tax may only worsen the state’s economic woes. Wisconsin’s Republican governor, Scott Walker, welcomed the Illinois tax hike gleefully, inviting businesses to move across the border.
Mr Walker is one of 13 governors who are advocating cuts in spending, and have signed a pledge not to raise taxes. Others have made less formal vows. But keeping them will be hard. In a survey last year by the Pew Centre on the States, about two-thirds of respondents believed that states could provide the same services for less. But trimming waste does only so much. The most costly programmes include education and Medicaid, which voters are loth to cut. As governors unveil their budget proposals, many will try to cut spending and a few may try to raise revenue. The wisest, however, will recognise the unfortunate truth that they must do a bit of both.