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Revenue declines, federal demands pressuring states

What does your bill for Internet access have to do with the services provided by your state and local governments? Should you care?

Yes, says Sen. Lamar Alexander, R.-Tenn., you should, because if Congress continues the moratorium on taxes for Internet access that has been in effect the past three years, state governments stand to lose $90 million to $120 million in revenue. The result, he says, would amount to just another unfunded mandate — a federal law or regulation that requires action by the states, but provides no money to pay for it.

“It's a familiar Washington story,” Alexander said in a letter to the Wall Street Journal. (Congress mandates) “special education for children with disabilities — but you local folks pay the bill. High standards for roads — you pay for it. New standards for highly qualified teachers — you pay for that, too. It's especially galling since state and local governments must balance their budgets, while Congress simply prints money.”

While it plays well with the homefolks to say that Congress is banning a tax, the reality, Alexander says, is that the lawmakers are favoring one local tax over another, with the decision made by Washington.

“Take away a state's ability to pay its bills with money from taxes such as those on Internet access, and you increase the chances it will impose a new income tax or a higher tax on food or medicine,” he says.

The $100 million-plus involved in taxes on Internet access is admittedly a small drop in the bucket of unfunded mandates. But almost every state is in a budget crunch as a result of the nation's economic slump and declining tax revenues. Essential services are being curtailed, the infrastructure's going to pot, and Congress and the administration continue to saddle state and local governments with regulations and programs, but no money to pay for them. $100 million here and $100 million there, and soon we're talking serious money.

Some analysts are saying the fiscal crisis faced by the states is the worst since World War II. The situation is so bad that many are supplementing their general funds with money from tobacco settlements (which, in most cases, was intended for anti-smoking programs, health care, etc.).

Twenty-nine states have raised taxes since 2001; yet nationwide, states will have an estimated $80 billion in budget shortfalls this year. That $80 billion is expected to grow to $120 billion in 2005. Although much-publicized in the recent recall election, California's fiscal crisis is not an isolated instance. It's just the largest.

Federal policies are worsening the states' fiscal crisis, says a report by the Center on Budget and Policy Priorities. “We estimate that federal policies are costing states and localities about $190 billion over state fiscal years 2002-05.” These policies include the impact of federal tax cuts; restrictions on state taxation, such as the federal Internet Tax Freedom Act; unfunded federal mandates; and shifting of many health care costs from federally-funded Medicare to state and federally-funded Medicaid.”

The skyrocketing federal deficit, however, makes it unlikely that Washington will be inclined to more than token efforts at relief to the states.

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