The new legislative reality: how leaders see it.

THESE ARE DIFFICULT TIMES FOR LAWMAKERS. THE ECONOMY FOR THE PAST THREE YEARS HAS CAUSED SEVERE BUDGET SHORTFALLS. HEALTH CARE COSTS CONTINUE TO RISE; EDUCATION MONEY IS SCARCE AND IT'S EXACERBATED BY THE NO CHILD LEFT BEHIND ACT. PUBLIC COLLEGES AND UNIVERSITIES ARE STRUGGLING TO MAINTAIN AFFORDABILITY AS STATE AID IS CUT. MANUFACTURING JOBS ARE BEING LOST; OTHER JOBS ARE MOVING. LEGISLATORS ARE CRITICIZED BY A SKEPTICAL PRESS AND A DISENGAGED PUBLIC. FIVE LEGISLATIVE LEADERS MET IN WASHINGTON, D.C., RECENTLY WITH ED FOUHY, EXECUTIVE DIRECTOR OF THE PEW CENTER ON THE STATES, TO TALK ABOUT LIFE ON THE JOB AND THIS NEW LEGISLATIVE REALITY.

Ed Fouhy

Tax collections are up, but growing health care costs will make it tough for most states to balance their books. Thirty-two states expect to end FY 2004 with a modest surplus, but 33 states expect to have budget gaps for Fiscal 2005. You've all had tough budget choices to make over the last three years. Where do you go from here?

Senator Carolyn Allen

Voters have passed a large number of initiatives in our state that take an enormous amount of money right off the top of our budget. We need tax reform--we need tax reform desperately.

Representative Joe Hackney

The fiscal situation in our state is similar to that of many. We have a three-legged stool in North Carolina with state and local taxation. We have sales taxes, income taxes and property taxes. Over the years, by virtue of effective political pressure, corporate income taxes have gone down as a proportion of the budget. And sales taxation has gone up because the public seems to have more tolerance for it. We have collected significant owed but unpaid taxes through aggressive collection, including out-of-state efforts. We've gone against corporate offshore or out-of-state loopholes. We have high hopes for the streamlined sales tax. We're trying to keep the state moving forward through the hard times.

Assemblyman Paul Tokasz

We're going to have our first $100 billion budget in New York this year. If you look back to the last three budget cycles, we were successful in sustaining the first difficult budget because we had tons of rainy day funds. This last budget cycle, we did broad-base taxes. Right now we have a huge issue, which is equitable funding for education.

Senator Robert Garton

Sales tax is a big income producer for our state. I think one of the major problems is we cannot collect sales tax on Internet or catalog sales. It may be as high as a $300 million loss in Indiana.

Senator Steve Rauschenberger

A logical increase in our sales taxes is to tax services. Publicly that's unacceptable, however. It is simply not going to happen.

Fouhy

Any thought of cutting programs?

Senator Allen

We're in budget negotiations now. The public does not want to be taxed, but they also continue to want certain programs that they believe are necessary.

Senator Garton

Indiana has a structural deficit of $1 billion at the end of this biennium. If you take K-12, higher ed, property tax reductions and Medicaid, you're at 80 percent of our budget. You're not going to get a billion dollar reduction out of the remaining 20 percent. But I've been saying for two years the economy is going to improve, and now I may be right. Housing starts are up, the stock market is much better, employment is coming back, companies are hiring again, tourism is up. I think we may work our way out of it without having to increase taxes.

Fouhy

But there's an 800-pound gorilla sitting in the corner, and that's Medicaid. It's consuming 20 percent of state spending and growing 8 percent a year. What do we do?

Senator Rauschenberger

We're running Medicaid and Medicare programs that were designed in the late '60s. Their model of benefit delivery has very little to do with the structure of medical delivery today or the real needs of...