From CQ Weekly,
Jan. 14, 2008

In Search of Revenue

Local governments could have more impact than the capital this year, but they’ll have to tackle deficits first

Preoccupied as it already is with the election, Washington is likely to accomplish even less in 2008 than it did last year, if that's possible. As the capital becomes increasingly paralyzed, the opposite seems to be occurring out in the country, which means that this year the policy trends out in the states, counties and cities probably will have more impact than those inside the Beltway.

So what are the issues and problems that are likely to dominate the debate in the states and localities this year?

There is one overriding dilemma that will affect many of the others: declining revenues. Almost half the states are suffering from a decline in real estate value, and some of their budget projections look increasingly dismal. California's projected deficit has doubled, to $14 billion. New York's is $4.3 billion. Florida's is $2.4 billion.

The same thing is beginning to happen to local governments. As foreclosures mount and property assessments flatten or fall, municipal and county revenues across the country are trailing off — just at a time when governments are facing increased spending pressure on transportation infrastructure, under-funded pensions and medical benefits for employees, on top of such traditional concerns as education and crime.

A number of governors and mayors — some at big political risk — have asked for tax increases. Mayor Richard Daley of Chicago, who is serving in his sixth term, asked his council for a 15 percent increase in the property tax, and got most of it with surprising ease. But down the road in Indianapolis, another Democrat, Bart Peterson, who was serving as president of the National League of Cities, also sought a tax increase and was summarily upset in his bid last fall for a third term.

Indiana's governor, Mitch Daniels, is trying to do what a lot of governors would like to: raise the sales tax as a trade-off for lowering property taxes, with the idea that the former is less unpopular than the latter. But even that is seen as something of a gamble for Daniels — who was George W. Bush's first Office of Management and Budget director — and who's facing a tight re-election race this fall.

Daniels personifies another trend at the state and local level, because he was the first governor who actually privatized a key piece of his state's transportation infrastructure, the Indiana Toll Road. The move was so politically unpopular that a number of other states have now at least hesitated in making similar moves. But there is the feeling that, one way or another, the trend is inexorable because infrastructure needs are so pressing, the gasoline tax is no longer capable of covering the bills and only so much money can be borrowed.

So expect to see a lot more debates about the privatization of all sorts of things — parking garages, airports, existing roads, new highways, public utilities, water systems and even state lotteries. At least a dozen states, including many of the largest, are thinking about that. Huge amounts of money are being assembled by major banks and investment firms to finance the purchase of public infrastructure.

BEYOND TAXATION

Again, look at Chicago. Daley successfully sold off the elevated highway connecting to the Indiana Toll Road, and he's busily been selling the city's downtown parking garages, as well as negotiating with the airlines and others to sell Midway Airport.

The search for new revenues will also intensify the increasingly pervasive push for more gambling because the financial returns are simply too alluring in the face of looming budget deficits. A vote to permit an American Indian tribe to run a casino is a lot easier than a vote to raise taxes. Seventeen states now receive more than 5 percent of their revenue from some form of gambling. Kansas has even decided to get into the business, becoming the first state to actually own casinos, though it won't manage them.

On the spending side, ambitious programs to expand health insurance coverage are at risk because of prospective deficits, especially as Medicaid costs are rising again. The same is true with crime and corrections. Federal funding for cops is being cut, while crime rates in some cities have risen again. One reason Peterson wanted more revenue was to pay for improvements in the Indianapolis police force.

So a wide range of issues out in the country directly or indirectly are financially driven, and current economic conditions don't offer a lot of pleasant options for political leaders. But there are some without price tags attached, at least initially.

Two stand out: immigration and climate change. Both are issues because of federal inaction, and both could have significant impact on state economies, depending on how they play out. Immigration legislation in the states is all over the place — a lot of it punitive, some protective. Laws passed at the city and county level often promote state action. The trend is clearer on global warming. Sixteen states are ready to enact caps on carbon dioxide emissions from automobiles if California wins a lawsuit filed this month against the federal government for denying the state a waiver to set its own standard.

There are other issues, of course: water, or the lack of it; voting regulations; same-sex marriage; abortion; and so on. But most of the big ones will be driven by money.

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