The Truth About Budget Deficits

Budget deficits have appeared all over the country. Most states and many large cities appear to be in the red. Most of these figures are probably real and not like the case of the Metropolitan Transit Authority that runs New York City’s transit system.

When the MTA bargained with Transport Workers Union Local 100 last year, it claimed to have a deficit of $236 million. It turns out that they had pulled a reverse Enron by disguising revenue as cost. They now admit to an $83 million surplus.

No, most states and cities that appear to be in the red probably are. But the reason has little to do with excessive spending on luxuries like education or the public workers politicians like to blame. Not even the revenue shrinkage from the current recession tells the whole story.

It has to do with the long-standing chain reaction of tax cuts on businesses and the rich, starting at the federal level and working their way down to state and city.


Since 1963, when JFK started the trend for tax relief for the wealthy, President after President, Congress after Congress has granted business and the wealthy tax relief. Since then federal tax rates on the richest 1% of families have fallen from almost 80% (no kidding) to 34%-before Bush sliced them more. On the business side, the corporate share of federal tax revenues has fallen from 31% in the 1950s to 15% by the end of the 1990s.

In the annual budget ritual, such tax cuts must be balanced by cuts in spending. In Bush’s original ten-year $1.4 trillion tax give-away plan, this would have meant cuts of $12 billion in food stamps, $124 billion in Medicare, and $93 billion in Medicaid, among others, over the decade. Most of these cuts would have come out of money earmarked for the states, where these programs are administered.



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The next step is that the states cut funds to the cities.

On average, states get about 15% of their revenue from federal grants-in-aid. Cities get 30% of their money from the states and 5% from the feds. If the money shrinks at the top it’s sure to dwindle even more down the line.

That’s only where it starts, because politicians like George Pataki want to cut state taxes on their rich friends too. Indeed, it is estimated that Pataki’s tax cuts cost the state $14.4 billion over the last eight years. Voila! A state deficit.

Note: that $14.4 billion is almost enough to cover both the state’s $11.5 billion deficit as well as the city’s. Add in the plunge in revenue from the recession, in fact blame it on the recession, and you have a genuine fiscal crisis that no union can deny.

Bloomberg, too, would like to keep the tax burden on the rich as light as possible. So, he avoided reinstating the tax on stock sales that once brought millions into the city’s coffers. He did ask for a commuter tax (a tax on non-residents who work in the city), but knew Pataki would never approve it. Instead, the Mayor implemented a property tax increase, much of which can be passed on to the city’s poor renters.

Now, with feds, states, and cities in the red, politicians can insist that programs like education, health care, and welfare, along with the workers who deliver them, are too expensive. Reduce the programs, cut the wages, lengthen the hours, and cut taxes on the high rollers even more.

At the recent New York Labor Notes conference, economist Mike Zweig ridiculed the city’s claim that there just isn’t any money. “Isn’t any money in New York City? Are you kidding? “ Zweig asked. “There’s plenty of money in this city. It’s just in the wrong hands.”