The squeeze on states
It is not only the federal government that wrestles with persistent deficits. Recession and high unemployment - coupled with curbs in federal spending - are also taking their toll on cities and states across the country. This is something the President and Washington lawmakers should bear in mind as they shape the final federal budget and other legislation.
The fiscal squeeze has become acute enough, in fact, to force some states to curtail services and to boost taxes to a point where they actually discourage consumer spending and thus undermine recovery. Michigan, for example, has just increased its income tax by 38 percent, retroactive to Jan. 1. Nor is it alone. Thirty-three states have either raised taxes or begun work on doing so. Thirty-eight states have slashed their budgets, cut back services, fired state workers, or imposed a hiring freeze. Despite such efforts, at least 19 states face a risk of red ink this year. Another 12 states are close to operating in the red.
What, then, can be done?
* First of all, Congress and the White House need to reach a compromise soon on the fiscal year 1984 budget. The states must know with as much certainty as possible what the Washington funding levels will be for future state and local programs so that they can plan accordingly.
* In fashioning the budget, lawmakers should address the problem of the federal deficits projected for the next few years - deficits which risk keeping interest rates high and preventing a sturdy economic recovery. As for ways of bringing the budget more into balance, Congress should be mindful of the urgings of state governors that annual real defense increases be held to between 3 percent and 5 percent.
* The administration's proposed ''New Federalism'' initiative ought to be dusted off and made the subject of active public discussion once again. Tough decisions are going to have to be made throughout the federal and state governmental structure about a range of public programs - from local sewer systems to public education. If a number of federal programs are to be turned over to the states - as proposed by the White House - the states will have to know where the tax dollars are coming from to finance them. If the programs are to be administered by both the federal government and the states, as is currently the case, it seems only fair that the Congress resist making any more deep cuts in budget funds for these programs.
The need for resolution on the federalism issue stems from the fact that, as one official with the National Conference of State Legislatures points out, devolution is in fact taking place through federal budget cuts. Total federal aid to states and local government, for example, was $88.7 billion in 1980. That amount dropped to $87.7 billion in 1981 and to $83.5 billion in 1982. The total is expected to rise somewhat this year, largely because of the sharing of federal revenue from the new 5-cents-a-gallon gas tax. But the trend is clear: Federal dollars have continued to shrink for states and local governments, while the demands on states for a whole range of social programs - because of the recession - have continued to grow.
* While exploring new sources of revenue (through hikes in income taxes and sales taxes, as well as user fees and taxes on professionals and service firms), the states need to be more enterprising in developing and supporting new industries. New firms provide jobs - and new tax revenues. In Michigan, 5 percent of the state's $7.5 billion in retirement funds will now be set aside as venture capital for new technology-related firms. Similar proposals are being discussed in Connecticut, Minnesota, Mississippi, Wyoming, and Massachusetts. Meanwhile, such states as Connecticut, Massachusetts, and Maryland are expected to join 17 states that have already enacted programs designed to train workers for high-technology jobs.
In addition to promoting manufacturing, the states must more energetically foster foreign trade, including agricultural exports.
In sum, national attention is now focused largely on the federal government and its budget woes. But it is vital to the nation's long-range economic well-being that the states, too, resolve their deepening fiscal and tax problems.