Dividend Tax Cuts Close Hospitals

One more time: All politics is local. Some, however, is more local than others.

President Bush's economic stimulus plan, which includes a provision for elimination of the double taxation of corporate dividends, has been examined from a variety of perspectives, but relatively little has been said about its impact on the states and cities, and the services they provide. It is highly likely that implementation of this plan, however desirable it may seem on the surface, will have an adverse effect on cities and states, at a level that will be felt by both businesses and individuals. If it's too soon to gauge the extent of the problem it's not too soon to recognize what it will be. States and cities that are already facing deficits, will be forced deeper into the red, leading to tax increases and service cutbacks.

It's that simple.

Right now, all the states are facing serious financial problems -&endash; the result of declining income combined with the results of optimistic judgments of the past. Gov. George Pataki of New York easily won his third term in November, but is now confronted with a $10-billion deficit for the coming year. Gov. Pataki has the luxury of blaming his state's problems on the terrorist attack on the World Trade Center, but some portion of the problem must be traced back to the policies of his first two terms.

Wisconsin has a smaller problem, only a $1-billion projected deficit. One proposed solution is to freeze school aid at 2002 levels. The Madison School District has estimated that this would mean a shortfall of $10 million for the 2003 year, which will have to be picked up at the local level.

Delaware has an anticipated deficit of $350 to $500 million. The Chicago Tribune estimates the Illinois deficit at $2.5 billion. The Olympian, of Olympia Wash., places that state's estimated deficit at $2 billion. Washington's Gov. Gary Locke, who has already laid off 935 state employees, has ordered another 400 job cuts, and warned that more will be required. California has an estimated deficit of $35 billion. On Friday, Jan. 10, the Washington Post reported that California's Gov. Gray Davis proposed deep cuts in schools, health and welfare and called for $8.3 billion in tax increases on shoppers, smokers and the wealthy to help close the state's deficit.

New Jersey faces a $4-billion deficit, in part because of tax cuts financed by cutting contributions to the state's pension plan, on the assumption that the value of the plan's investments would continue to rise with the Dow Jones Industrial Average.

The problems of state and city deficits cross party lines. In Alaska, the Republicans have tried to block an effort to patch the hole in the budget by drawing on the state's reserve funds, while in Montana it has been the Democrats who have played fiscal conservatives, blocking withdrawals from the Coal Trust Fund.

Sin taxes, such as increased taxes on cigarettes, have been raised. In Maryland there has been an effort to increase revenues by legalizing slot machines. Ohio is prepared to offer slot and video machines at racetracks, and permit riverboat gambling. The Washington Post reported 18 states are considering loosening restrictions on gambling in return for a larger share of the take. Connecticut is the only state trying to cut back on gambling, in spite of having a $1 billion deficit to cover.

New York City's Mayor Michael Bloomberg has proposed reinstating a commuter tax, a tax on income earned in New York City by persons living in the suburbs. Bloomberg, a Republican, has already approved a record 18.5% hike in city property taxes, but most politicians have been resistant to propose tax increases that would affect their own constituents. Governors are concerned that higher taxes will not poll well with the electorate, and will be unattractive to business.

Predictably, the states will turn to expense reduction in order to close budget gaps, and this will mean major cuts in health-care and school funding. This is less a reflection of attitudes towards health and education than the essential reality that these two areas consume most of a state's budget. State deficits become a quality of life issue. School class sizes get a bit larger, you have to drive a bit further to find an emergency room, and when you get there, there's a longer wait. Teachers and nurses may be a bit less proficient, because the salaries and working conditions don't attract the best people.

Eliminating taxes on corporate dividends will only make this situation worse. States can borrow money at low rates because of the tax-free status of municipal bonds. If corporate dividends offer the same tax benefits, there will be increased competition for the investor's dollar, and interest rates will inevitably rise. This will increase the expenses for the states, which have enough problems already, and will lead to higher state taxes, and further cuts in spending for education and health care. The benefits will be to those people who are holding dividend paying stocks outside their 401(k) plans, or those who invest in tax-free bonds. It will hurt those who depend on Medicaid for health care, or who send their children to public schools.

Maybe the administration never noticed this. Worse yet -&endash; maybe they did.

Sam Uretsky is a writer and pharmacist living on Long Island, N.Y.

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