MARKET FOCUS: Painful measures

Cash-strapped states must push tax hikes or program cuts.

Cash-strapped states must push tax hikes or program cuts.

Say what you want about the ballooning federal deficit or the listless Dow; the most immediate financial threat facing America today may be the collective state budget shortfalls. All told, American states are about $70 billion short of cash. And unlike the federal government, which can (and does) borrow like a gambling addict, most states are required by law to maintain a balanced budget. And that means America's governors are in a tight, tight spot. Of course, if you want to lose your job as governor, raising taxes is a great way to do it. Eliminating vital services, such as hospitals or the state police, is a close second. A third option is - whichever of the first two routes you take - to find someone else to blame. What's clear is that balancing a budget doesn't just require expertise in economics or finance or politics or governance. Getting the public to accept what needs to be done requires savvy public affairs ability. Blaming someone else for having to take stringent measures may be attractive from a political standpoint, but there are reasons it may not be the better PR choice. The best scapegoat in a budget shortfall is usually one's predecessor. If you can pin it on the previous governor's lack of fiscal discipline, you can at least make the case that the income-tax hike - or the elimination of the state police force, an actual proposal in Wisconsin - isn't your fault. Unfortunately, the factors that created most state budget problems today can't realistically be pinned on anyone in particular. The economic slowdown stemming from the 2000 dot-com bust coupled with the Dow's plunge after the September 11, 2001 attacks (which continue to have their own costs) reduced income-tax revenues and put everyone in a pinch. Try throwing around the blame for that, and see what happens to your approval ratings. Of course, you could always find a way to stick it to the other party, a tactic that never goes out of style. Pointing fingers across party lines "Some of what you'll see is each side forcing the other into certain positions," says Bill Murray, head of public affairs at The MWW Group, which has close ties to the office of New Jersey Gov. James McGreevey. "If the house is controlled by one party and a governor is of another party, each will try to force the other into certain situations. The governor may recommend a budget that clearly is not able to be reached, just so the other side will have to be the ones to cut key programs. 'Well, I gave them a conservative budget, but look at what they did.' Each side tries to put the other into a position of having to be the bad guy." It's a game in which governors, as the first ones to produce an actual budget, hold an advantage: They enjoy the benefit of striking first. However, they suffer the pitfalls of being the ones required to produce a comprehensive plan in the first place. "The governor is sometimes at a disadvantage, PR-wise, because he has to put his money where his mouth is," says Roger Salazar, senior counselor at Porter Novelli, and former press secretary to California Gov. Gray Davis. "He has to produce a total plan for how to balance the budget, but the [legislators] pick and choose the parts they want to highlight positively or negatively." But the blame game in any form has its political downfalls. It alienates voters and drags out the process. So better just to find a more popular way of raising money - and state governments are coming up with some creative ones. The most popular is to raise taxes on items that few people are going to speak in favor of, and so may be easier to put across. "Politically, the less-painful route is to go after cigarette taxes, which most people don't really consider taxes," observes David Brunori, contributing editor for State Tax Notes. Indeed, virtually every state has proposals to do just that this year, even though many increased them just last year. As Brunori explains it, cigarette taxes won't actually do much when it comes to balancing the budget. "It's a short-term solution," he says. But it works wonders as a PR tactic. "Domestically, the tobacco industry remains a bad guy," Brunori says. "Smoking is bad for you. Everybody recognizes that, so nobody feels bad about taxing cigarettes." Nearly as good are tax increases on other "sin" items, such as beer and liquor. While several states are considering such hikes, they tend to come with a higher price tag. The alcohol industry simply doesn't suffer from the PR problems that have long burdened Big Tobacco; hence they draw more public sympathy. Plus, higher beer taxes are often seen as burdening the middle and lower classes. Some states, including Nebraska and Washington, are considering taxes on candy and soda - not surprising now that junk-food companies have begun drawing public ire. Some states have even tossed around the idea of taxing fatty fast foods. But much more profitable - and in recent years, popular - than sin taxes is gambling. Maryland, Ohio, and Minnesota are among the states that have considered implementing or increasing state-controlled gambling. While there remains hearty political opposition to such measures in many places, the PR drawbacks aren't terribly severe. Brunori calls them an easy sell because they burden only those people who choose to participate. He does warn, however, that the public may be losing its appetite for raising revenue through craps tables and one-arm bandits: "The policy arguments against it are very strong." Promoting less desirable options While all these proposals are fairly painless, PR-wise, they aren't going to bring in $70 billion on their own this year. So in the end, painful measures have to be taken. Luckily, there's a way to promote those, too. "The second and more difficult thing governors can do is make the case that their proposals are the least-worst option, and the only way to do that is to line up their proposals against other more severe things they would have to do," says Larry Haas, a former communications director at the White House Office of Management and Budget. "It's very laborious work, and it will only be partially successful. But governors can at least cut their losses." Brunori, who also teaches tax law at George Washington University Law School, concurs. He sees governors in the bigger states with the bigger deficits "trying to draw stark contrasts, saying, 'You've got to raise income taxes or we're going to have to lay off teachers or state troopers, or not pave the roads this year.' They sell the alternatives as being draconian, which they often are, and the average person in the street says, 'Wow, I really don't want my school to be cut and I don't want fewer police officers in the street.' That's the public-opinion strategy that is going on." But it's a strategy that requires constant reinforcement. "If I were advising a governor, I would say he or she would have to be explaining the trade-off every single day in as much detail as possible," says Haas, who is now director of public affairs at MS&L. Exactly how well any of these tactics will work won't really be known until election day rolls around again, and for most governors, that won't happen until 2004 or later. The American political memory tends to be short, so it's likely that whatever steps are taken this year could largely be forgotten by then. And there are even reasons to believe that voters, more appreciative of government's role since September 11, may be more understanding of the need for new revenue streams than they have been in the recent past. "The public-opinion polls actually show that the public is much more willing to pay higher taxes than political leaders are to propose them," says Brunori. ----- Mayor talks big budget problems The New York City budget deficit now stands at about $3.4 billion, no shock considering the costs of the attacks on the World Trade Center, the economic lull, the settlements paid out by Wall Street investment firms last year, and this winter's costly snowstorms. Mayor Michael Bloomberg faces a difficult challenge in balancing the books without infuriating voters. Still, his blunt way of selling drastic measures reflects the severity of the situation. There was little surprise, though plenty of public outrage, when the usual tax hikes came to pass. The subway fare will soon increase by 50 cents; property taxes have gone up 18.5%; cigarette taxes, already the highest in the US, will rise yet again; tolls on roads and bridges may soon rise; and both the price and frequency of parking tickets will increase. Other measures are even less popular. Proposals to close eight fire stations, lay off 5,400 city workers, slash education funds, reinstate the commuter tax, and close down two zoos have drawn outrage from New Yorkers, advocacy groups, and politicians - even those in Bloomberg's own Republican party. So how has the mayor sold such changes thus far? He's given New Yorkers what appears to be a choice. They can accept these measures or take the $1 billion "contingency plan." Or as city hall workers morbidly - and publicly - refer to it, the "doomsday budget." That plan would eliminate all after-school educational programs and summer school for nearly all. More than 1,000 school workers would lose their jobs. The July 2003 police-academy class would be scrapped, leaving the NYPD at its lowest level in a decade. The police and sanitation departments would collectively shed nearly 2,000 jobs. And if that doesn't work, the mayor is betting that enough New Yorkers recall what happened the last time their city allowed their fiscal problems to go unchecked: "We cannot make the mistake of the '70s, and destroy this city," he warns.

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