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EDITORIAL

Budget Backfire

05/05/08

An alarming slide in state revenues is cause for immediate action. Economic activity in the state has slowed dramatically. The state’s once robust $281 million surplus just months ago has been transformed into a nearly $68 million deficit — a $350 million swing — according to state Comptroller Nancy Wyman.

The news has alerted state lawmakers to the realities of the recession, something that many businesses are well aware of. Food and fuel prices are up, squeezing consumers, who are spending less.

As retail sales have softened, state sales tax revenues have slumped. Wyman said last week that the state will see about $29 million less in sales taxes than previously forecast.

That’s not the only factor affecting state revenues. Job growth has been stagnant since last July, and in the last three months, more than 7,200 jobs were lost. Fewer jobs mean less state income tax.

There are more reports of corporate woes, such as General Electric’s announced plan to slash costs by $3 billion and The Hartford Financial Group’s 83 percent Q1 earnings nose dive. When corporate profits take a hit, so do state corporate taxes.

Therein lies the rub. The problem with a downturn is that those at the bottom of the financial ladder often need more services. That puts even greater fiscal pressure on state resources. Social service agencies and nonprofits are already operating on extremely tight margins, if they even have a margin to speak of.

Lawmakers have taken notice of the state’s deteriorating revenue situation and are throwing out a number of options: a gas tax holiday, an early state retirement plan and a budget freeze. It’s good that they are not forging ahead oblivious to the mounting deficit and the anticipated downturn. However, an across-the-board state budget cut or a budget freeze is not the right answer. It may sound great on paper, but it will backfire in the long run.

In fairness, the task facing lawmakers is not an easy one. However, in light of the growing state deficit, it would be irresponsible to pass the state budget without slashing state costs now.

The key is finding budget cuts that do the least long-term damage. Social service agencies and nonprofits are already cash starved. So are the state’s major cities. The state also has a number of transportation and infrastructure projects that should not be ignored because they are the foundation of the state’s national and global competitiveness.

In the face of these many legitimate demands for state revenues, when the midnight oil burns at the end of the legislative session, the most tempting solution is often to take aim at the state’s businesses.

Tax credits and tax incentive programs are deemed expendable. New business taxes are created or existing ones are raised.

After all, the session-end reasoning often goes, the purpose of business is to make money, so it would seem to make sense that the state’s businesses can afford an increased tax hit.

But taking another bite out of business profits or eliminating inducements to lure and retain businesses in the state will surely come back to bite the state in its own pocketbook. Businesses must pay their own bills, and they constantly eye other states where the cost of doing business is lower.

Budget cuts must happen. But legislators must balance the state’s social service needs, improve its infrastructure and help grow businesses.

In the end, a healthy economy is really about jobs. If lawmakers balance the budget on the backs of business, more jobs will be cut. If that happens, in the end, the state’s money tree will shake out even fewer greenbacks.