America's midsection works away at budget trims

Budget cuts and tax reform may be just about wrapped up in Washington, D.C., but the process is just beginning in the rest of the country. Squeezes loom over many state and local budgets during the next few years. Not only will the flow of federal funds slow, but more important, a continuing rural recession could make it harder for state and local governments to raise money.

Already in the past year, Texas cut its state budget 13 percent. Minnesota and Idaho reduced their budgets twice, while Arkansas approved cuts four times. Not everyone faces this gloomy scenario. Generally speaking, the East and West Coasts are prospering. The severest budget squeezes lie in the nation's midsection. Even then it's patchwork trouble.

``What you're seeing is a real division in the economy of this country,'' says Karen Benker, a staff associate of the National Association of State Budget Officers. ``If you look at the Mississippi River and go west, that's where your trouble starts.''

``The crunch is coming,'' adds Frank Shafrath of the National League of Cities.

The major cause of distress is the downturn in the nation's natural-resource industries. The slump in farming, mining, lumbering, and oil drilling has wreaked havoc on states and communities that rely on these industries. For every $1 drop in the price of a barrel of oil, Montana loses $3 million of state revenue, according to Gov. Ted Schwinden. The losses in Texas and Oklahoma are much higher. Oklahoma just missed a revenue shortfall this fiscal year by borrowing $20 million from an income-tax refund reserve. And a $12 million cut in state higher-education funds has meant record budget cuts and employee layoffs at the University of Oklahoma.

Large cities -- even in the Midwest -- tend to be doing well. But even there, the general prosperity has not buoyed the pockets of industrial gloom, where workers in steel and other basic industries continue to lose their jobs.

Proposed cuts in the federal budget threaten to strike another blow for these troubled areas, according to state funding experts. ``It tends to make a tough situation somewhat tougher,'' says John Shannon, executive director of the Advisory Commission on Intergovernmental Relations. Funds from general revenue sharing -- federal money targeted at local governments -- would be the biggest loss, says Mr. Shafrath.

Needy urban areas would lose the most dollars, but agricultural areas would see the biggest percentage losses. Revenue sharing makes up 44.5 percent of all the federal aid received by farm-dependent local governments. Also looming are cuts in other programs, such as community development block grants, and the overall threat of across-the-board reductions by the Gramm-Rudman deficit law.

Ironically, tax reform that could cut federal tax rates could also bring in new revenue for some states. ``It's going to be a time of adjustment,'' says Enid Beaumont, director of the Academy for State and Local Government. ``Some are going to benefit, some are not.'' Because the proposed federal reform would broaden the tax base, states that use the federal base and use their own tax rate stand to gain more revenue. But federal reform will likely push states to reform their own tax systems.

Already, there are signs of a new grass-roots tax revolt like the wave that swept the nation in the late 1970s and early '80s. Initiatives are under way in eight states as well as in San Antonio, Texas, according to the American Federation of State County and Municipal Employees (AFSCME). The union is worried that governments may lay off more of their members.

``I'm very worried about that,'' says Iris J. Lav, assistent director of public policy for AFSCME. The union faces a difficult challenge in Wisconsin, where cuts and freezes in federal and state money are causing counties to consider closing county-run nursing homes or asking unionized workers to take concessions.

Many rural residents, meanwhile, are finding state and local taxes increasingly burdensome.

When the commissioners of Cedar County, Neb., gave themselves and county office workers a 5 percent raise, Marvin DeBlauw and other local farmers formed a protest group. The farmers weren't successful in rescinding that raise but did manage to block a 5 percent raise to county road workers. ``They keep spending money like it's there,'' Mr. DeBlauw says. ``And it's going to run out sometime.''