In the last year or so, we’ve seen some relatively large federal assistance provided to a few fairly large private industries. Last year, it was the $15 billion grant and loan package to “bailout” the airline industry after the September 11 attacks. At the time, it was seen as the prudent thing to do, since the federal government had grounded all flights for days until it could return some sense of security to the skies. White House Press Secretary Ari Fleischer explained that the assistance was necessary because "a safe, viable and effective commercial air travel system is important to America’s economy and to our way of life."

In the last year or so, we’ve seen some relatively large federal assistance provided to a few fairly large private industries. Last year, it was the $15 billion grant and loan package to “bailout” the airline industry after the September 11 attacks. At the time, it was seen as the prudent thing to do, since the federal government had grounded all flights for days until it could return some sense of security to the skies. White House Press Secretary Ari Fleischer explained that the assistance was necessary because "a safe, viable and effective commercial air travel system is important to America’s economy and to our way of life."

More recently, the Terrorism Insurance Risk Act, which the President signed on November 26, guarantees that in the event of another terrorist attack, the federal government will pay 80 percent, and in some cases, 90 percent, of the total insurance payments. Advocates for this law insisted it was the only way to get the nation’s construction projects up to speed again, and, as the President explained at the bill signing, "The nation’s hard hats will get back to work, being able to put food on the table for their families." As in the case of the debate about the airline industry’s assistance package, the bill’s supporters argued that this federally-funded aid to private insurance companies was necessary for the health and well-being of the nation’s economy.

In both cases, the arguments for federal assistance to private industries were grounded in a sense of a shared burden and the need for a shared responsibility for the recovery. These arguments were even strong enough to counter charges that federal assistance shouldn’t go to private companies who were struggling even before the September 11 tragedy occurred. Instead, these costly pieces of legislation were enacted with the understanding that an investment in private airlines now, is better than confronting the shutdown of the nation’s major air carriers and the likely detrimental impact on the economy.

What about the States?
Curiously, however, the same argument – federal funding to specific entities to protect the national economy – has not been applied so aggressively in assessing the various proposals of an emergency federal aid package to financially strapped states. Though state and local government spending comprises about 9 percent of the nation’s GDP and states continue to suffer from shrunken tax revenue, as a result of the economy’s troubles, there has been no legislation to provide assistance to this important component of the national economy.

The parallels between the situation of the unfunded states and that of the bailed-out airlines and insurance companies are striking. Like both the airlines and the insurers, the states are also contending with the added costs of their new responsibilities in providing for the homeland security needs imposed by the post-September 11 environment. Like the airlines concerned about the impact on their revenues of a public now cautious about flying, states have also been struggling to manage their budgets in the face of reduced tax revenues. Specifically, according to the recently released National Governors Association’s (NGA) Fiscal Survey of the States, states collected 9.7 percent less in sales, personal income and corporate income tax revenue in FY2002 than they had expected. When combined with a 13.2 percent increase in state Medicaid spending, states have been left with little choice but to cut spending wherever possible. One of the first steps in this effort was the indefinite postponement of capital improvement projects, just as many companies had done in response to an insurance industry unwilling to insure large office buildings. States have now had to turn to more drastic measures, including across-the-board cuts, layoffs of state employees, and a heavy reliance on their “rainy day” funds.

While the federal government, state government, and private industry all suffer together from the slowed economy, the federal government has placed a unique burden on the states, not once, but twice in the last 18 months. One example of this is the fallout from the repeal of the estate tax. A too-little discussed element of the $1.35 trillion tax cut the President secured in June 2001 is how the federal government funded the costly estate tax repeal included in the overall tax cut: they took the money from the states. Recognizing that they couldn’t afford to let the states phase-out the estate tax at the same 10-year pace that the federal government would enjoy, Congress and the President scheduled an accelerated 5-year phase-out of the states’ share of the federal estate tax. In 2005, while the estate tax is still providing needed revenue for the federal government, states will lose their so-called “pick-up” tax and the more than $6 billion in revenue it provides annually. (For more on the costs to the states of federal estate tax repeal, see the Center on Budget and Policy Priorities, which has helped to educate states about what to do to retain this revenue.) The economic stimulus package enacted in March 2002, which reduced corporate income taxes for the next 3 years, placed a similar burden on state treasuries, most of which tie their own corporate income tax to the federal rate, while doing little to help the national economy, according to many economists.

With a gaping $67 billion cumulative state budget shortfall that must be bridged by the end of the states’ fiscal year, June 30, 2003, and with a greater demand on the services states provide due to higher unemployment rates and an end to extended unemployment benefits, it seems logical that some sort of “bail out” or “loan guarantee” is in order. The need for assistance is even more pressing because, unlike the federal government, all but one state (Vermont) must balance their budgets every year. Under current conditions, this will likely mean further program cuts and tax increases (according to the NGA report, 26 states made across-the-board funding cuts and 24 states enacted tax and/or fee increases this year) – a deadweight for the nation’s economic recovery efforts.

Revenue Sharing, Anyone?
As economists, including the Economic Policy Institute’s (EPI) Max Sawicky, and state finances experts, such as Ambassador Felix Rohatyn and former New York Comptroller Carl McCall, have been arguing for more than a year, what is needed to prevent this sort of wrench in the national economy is a sizeable federally-funded aid package to state treasuries. In this October 2001 piece, Sawicky pointed out that, "balanced budget requirements and other tax and expenditure limitations reduce economic growth and employment at a time when the nation can ill-afford such losses" and recommended $20-30 billion for states over a 12-month period. Rohatyn and McCall and others, calling state budget cuts a "land mine squarely in the path of economic recovery," went farther and issued a recommendation in December 2001 for a one-year $100 billion “program of federal revenue sharing to counter the potentially damaging impacts on the economy of the budget crisis … facing states and localities … [to] maintain funding for needed capital projects and essential services such as education, health care and public safety.”

Though the idea may sound infeasible, the country did have a “general revenue sharing” program in place from 1972 to 1986 – when the program began, more than $20 billion (in 1996 dollars) was granted. This relatively unstructured grant assistance to states and localities was touted as a way of reducing the direct involvement of the federal government in state programs, but a survey of state and local finances conducted by EPI in 1996 also found that this form of “unrestricted federal aid stimulates state and local public investment.”

For those averse to a return to federal revenue sharing, Sawicky also suggested providing the federal aid in the form of increased funding for existing programs, such as Medicaid, at the state level. This idea was taken up in the House and Senate this fall, in the form of an increase in the federal matching rate for the states’ Medicaid programs. With the House bill offering $5 billion and the Senate bill offering a more stimulative $9 billion, including additional funding for some social services block grants, and strong opposition from the President, no compromise was reached. Governors and state legislators met on Friday to discuss their shared troubles and to plan a renewed push for federal assistance when Congress returns to Washington in January. Arkansas Governor, Mike Huckabee summed up their message, telling the Washington Post on Friday, “when we hear that the government is going to bail out the airlines, to heck with the airlines. We’re providing the services that you [the federal government] are supposed to be providing. Help us out.”

Something Has to be Done
Thus the states remain in their current predicament. The nation’s unemployment rate topped 6 percent for November, a notable jump from October’s 5.7 percent rate – and the highest rate in the last 8 years. States are grappling with $12.8 billion in cuts from FY 2002 and an additional $8.3 billion in cuts thus far in FY 2003. At this point, the President and Congress need to recognize that penalizing states for cutting taxes in better times (as the federal government, itself, did), while also placing some of the burden of costly federal tax cuts, as well as new homeland security needs on the states will only work against their efforts to stimulate the national economy. When Congress returns in January, it is expected to begin working on an economic stimulus package. Let’s hope that this time the stimulus will not work against itself: if corporations are going to receive federal income tax breaks again, the states shouldn’t be left searching for ways to make up the lost revenue. Congress should see the states and their current budget crises as a source of quick turn-around on spending for services, workers and domestic security.