States get $20 billion to help close huge budget gaps

School technology initiatives and other education programs are among the possible beneficiaries of $20 billion in state aid included in the $330 billion tax-cut legislation passed by Congress May 23.

Though education lobbyists say the latest federal aid is “nothing to scoff at,” they note it doesn’t come close to filling an estimated $75 billion in state budget shortfalls projected for the 2004 fiscal year.

The state aid was included in a package of new tax cuts for families, investors, and businesses signed into law by President Bush May 28. The Republican-led Senate approved the measure 51-50, with Vice President Dick Cheney casting the decisive vote in the narrowly divided chamber. The GOP-run House had passed the legislation by a 231-200 margin.

Of the $20 billion in state aid, half that amount is earmarked for the Federal Medical Assistance Program. The remaining $10 billion will be divvied out to states—on a population basis—to cover the cost of government-related programs, including education expenses.

States will receive $5 billion for the remainder of 2003, which will be allocated within 45 days of the legislation’s effective date. The other $5 billion will be applied toward the 2004 budget year and is scheduled for delivery after October 1.

To receive the funds, states must submit a proposal to the Treasury outlining what government services and programs the funds will be spent on.

“Certainly, the $10 billion will have the effect of providing all-purpose relief to states,” said Nick Johnson, director of the State Fiscal Project at the nonpartisan Center on Budget and Policy Priorities. “But this is only a modest piece of the overall solution.”

State budget shortfalls are expected to surge to $75 billion overall by the next fiscal year, according to a report issued in April by the National Conference of State Legislatures. Across the nation, state and school leaders are considering steep cuts in education services—including art and foreign language classes, school counselors and nurses, field trips and athletic programs, and technology—as they try to balance the rigorous demands of the No Child Left Behind Act with the need to slash budgets. (See “Budget ax falls on school tech programs,” news/showStory.cfm?ArticleID=4407.)

Some states, Johnson said, are in such dire straits that this latest relief will hardly make a dent in overall budget deficits.

In California—where budget deficits are expected to climb above $30 billion, by some estimates—the $2.4 billion in relief that will come as part of the president’s tax plan will do little to stop the bleeding.

However, smaller states might enjoy considerable respite, Johnson said: “This should go a long way in addressing their immediate budget problems.”

Mary Kusler, policy analyst for the American Association of School Administrators, noted that education is one of a number of different needs that states probably will attempt to address with the money.

“It’s really going to boil down to what is the greatest need at that point,” she said. “We’ve just got to get these states some help.”

Internet tax moratorium

While the president’s latest tax-cut plan will deliver much-needed relief to states, another option for boosting state revenues now appears less likely.

The Bush administration wants Congress to extend a moratorium on states’ ability to collect internet-access taxes that is set to expire in November, Treasury Secretary John Snow says.

Snow, speaking May 15 at a gathering of technology company executives, said he and Commerce Secretary Don Evans submitted a letter to Congress urging that the moratorium remain in effect.

“Government must not slow the rollout or usage of internet services by establishing administrative barriers or imposing new access taxes,” Snow and Evans wrote.

In 2001, President Bush signed legislation extending the moratorium for two years; he had sought a longer extension.

The moratorium bars taxation only on internet access fees, like those paid by consumers to providers such as America Online. However, Congress also has failed to pass necessary legislation that would empower states to collect sales taxes on purchases made over the internet.

The only way such taxes are paid on interstate transactions is if a consumer voluntarily pays the tax to the state treasury or if the retailer voluntarily collects it on the state’s behalf. A group of retailers reached agreement earlier this year with more than 30 states to voluntarily pay the taxes.

Many state governments seeking additional revenue to close budget deficits have been eyeing internet sales, which continue to grow.

The National Governors Association has sought an end to the moratorium and congressional legislation allowing states to set up a taxing scheme. Collectively, states are losing billions of dollars a year in tax revenue. In 2002, retail internet sales reached $76 billion, or about 3 percent of all retail sales, according to an annual survey released May 15 by Forrester Research and the National Retail Federation.

Supporters of the moratorium argue that internet commerce is still in its nascent stages and needs to be cultivated, and that allowing states to impose sales taxes will curb growth in the sector.

See these related links:

Center on Budget and Policy Priorities

National Conference of State Legislatures

American Association of School Administrators

U.S. Treasury Department

U.S. Department of Commerce

National Governors Association

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