Stimulus unlikely to fully fix state problems

by Lisa Lambert - Analysis

WASHINGTON (Reuters) - While most U.S. states are looking forward to a large, speedy cash injection from the recently-enacted $787 billion stimulus bill, few are banking on it fixing all of their economic problems.

"Will there still be cuts? Will there still be projects delayed and whatnot?" asked Michael Bird, federal counsel for the National Conference of Legislatures, at the National Press Club. "Absolutely."

John Thomasian, who will guide governors through the process of requesting stimulus funds as a staff member at the National Governors Association, said billions of dollars to be distributed to states through boosts in Medicaid, roads and bridges and education funding were significant. But the states "are not in Eden."

"This is making something very bad less bad," he said.

Without the aid in the stimulus bill, states face overall budget gaps of $131 billion in 2009 and $181 billion in 2010, the Government Accountability Office reported last month.

Altogether, states will receive around $150 billion over the life of the plan, according to the White House, equal to roughly half those projected gaps.

Very little of the stimulus money -- $8 billion out of a $787 billion package -- can be used directly to help stabilize state budgets.

Maintenance of effort requirements in key areas such as education and transportation will make it difficult to supplant state money with federal dollars. Those requirements bar states from receiving money unless they maintain a prescribed level of spending.

SHOT IN THE ARM

The stimulus bill is unparalleled in the amount of help it gives states. Responding to the last recession in 2001, the U.S. government sent $20 billion to help states recover, half of which was dedicated to covering Medicaid costs, the healthcare program for the poor. In this plan, $87 billion alone would go to states for Medicaid and there are an "unprecedented number of spigots" for other funds to flow to states, Thomasian said.

States are also wondering if the stimulus bill will create problems for their revenue streams through its many tax provisions. Bird said most of the tax credits -- such as the $400 individual credit -- will not affect the baselines states use to compute taxes due. It could even provide a boost if taxpayers buy things with the money they receive from the credits and pay sales taxes.

Many states, however, have tax codes that mirror the federal code and will take a hit from tax breaks included in the recovery package, such as the bonus depreciation and the small business breaks, if they do not "decouple," he said.

Similar breaks were included in the 2008 stimulus plan and most states easily severed links to them.

Bird said that tax deductions in the plan for buying new cars may affect how individuals determine their incomes, which will drive down the amount of state income taxes they pay.

Counties are also worried, said Edwin Rosado, legislative director of the National Association of Counties, as rumors are rife that some governors of Southern states will not certify the stimulus money. If a governor does not agree to accept the money within 45 days, state legislatures can vote to take it, but the deadlines for those votes are unclear.

Most local government relief will flow through states.

Others fret that the pressures that the plan is designed to ease could resurface once it expires in three years.

"While the federal stimulus package is a huge boon to the finances of state governments, even under optimistic assumptions it is not large enough or sustained enough to eliminate the need for significant state spending cuts or tax increases," said Mark Marchand, economist at the Rockefeller Institute, in a recent report.

States could face aggregate budget gaps of $70 billion to $120 billion in three years.

"States should use stimulus aid to help them make orderly decisions about how to trim spending and/or raise taxes, but cannot count on the stimulus package as a substitute for these actions," he said.

(Editing by James Dalgleish)