Putting the squeeze on: the issues are on the table. But is the money? Our annual look at the session's top 10 issues.

• Author: Rose, Gene

Blood out of a turnip. Toothpaste from a 1) flattened tube. Water from a stone. Gold from a miser.

Add a new item to the "tough things to squeeze" list: state budgets in 2003.

State legislators around the country have a common problem this year. Declining revenues and growing demands will force each of the 50 states to take a hard look at their budgets. Consequently, every issue before lawmakers in 2003 will be weighed against its financial worth.

Each year at this time, we look over the political and policy landscape in America's legislatures and offer our prediction on what major issues state policymakers will address in the next 12 months. Instead of simply saying "budgets" 10 times really fast, which would be a simple and yet accurate account, here is our forecast of 10 issues we believe will cross state boundaries on a national scale in 2003.

THE BACKDROP

Declining revenues and the 2002 elections provide the backdrop to the start of the 2003 legislative sessions, many of which begin this month.

History tells us that in years of a flagging economy, it's hard to put new issues on the table. Tight budget times, however, provide legislators with a new perspective on state problems and often result in innovative solutions.

The 2002 general elections produced an interesting twist on how issues are addressed this year. Newcomers hold 24 percent of the 6,214 state legislative seats that were up for election in November--the largest turnover in the last 40 years. Term limits, redistricting and a Republican surge at the ballot box combined to produce this. Over the last 20 years, only 18 percent of legislative seats have changed hands in a given year.

Also, there are now more Republican state lawmakers than Democrats for the first time since 1952. The question remains whether legislatures will aggressively seek a party-line agenda or take a more moderate approach and build coalitions to achieve goals.

1--BUDGETS

For the current fiscal year ending June 30, states will address a collective $17.5 billion budget gap. The list of states with expected deficits is sobering: California, $6.1 billion, Virginia, $950 million, Michigan, $600 million, Maryland, $590 million, Colorado, $558 million, Massachusetts, $547 million, Arizona and Pennsylvania, $500 million.

Thirty-three states report revenue estimates below original targets. Only eight states--Florida, New Mexico, North Dakota, Rhode Island, Tennessee, Utah, Washington, West Virginia--report a stable outlook, and two states--Hawaii and Wyoming--are optimistic about revenue performance.

Last year, many states were able to use rainy day funds and take other measures to address the more than $37 billion shortfall. Also significant for FY 2003, states raised taxes by $9.1 billion in the aggregate--breaking a trend of annual tax cuts that began in 1994. Only Hawaii cut taxes by more than 1 percent while 18 states raised taxes by more than 1 percent.

A recent survey of state fiscal offices indicates that the fiscal news will force states to take painful budget actions in the 2003 sessions. Revenue collections have been sluggish at best during the first four months of the fiscal year, and overruns--particularly in Medicaid programs--are already being reported in at least 24 states. Massachusetts will cut 50,000 people from its Medicaid rolls and still faces a $300 million gap in the program. Georgia reports a $417 million shortfall in Medicaid. States may be looking at raising the standards for Medicaid eligibility, after years of increasing the rolls during the cash-flush '90s.

The budget landscape will be changed dramatically in nearly half the states. Legislators in 24 states will be working with new governors, who often are responsible for drafting working budgets for lawmakers to start with.

States also will be keeping a wary eye on Congress. After years of successfully fighting off most unfunded mandates, a Congress that also is looking at lower revenue projections may be tempted to approve popular programs for states to implement, without adequately funding them.

2--STREAMLINING THE SALES TAX

States have taken the lead in simplifying a sales tax structure that may provide a fairer balance for consumers and Main Street merchants. A key group of policymakers has endorsed the Streamlined Sales and Use Tax Interstate Agreement, which will help simplify sales tax collections in this country.

"The agreement provides states with a blueprint to create a simplified sales and use tax collection system that removes the burden and costs of collecting the taxes from sellers," says NCSL President Angela Monson, a senator from Oklahoma.

While local businesses pay taxes on goods and services they sell, out-of-state corporations have taken advantage of not charging sales taxes to their on-line customers. Consequently there is less money for local projects that sup port schools, roads and other needed programs The University of Tennessee estimates this contributes to a collective $16.4 billion annually in sales and use tax revenue that is being diverted from states and local communities.

Ratification of the agreement also lays the foundation for Congress to overturn the Bellas Hess and Quill Supreme Court decisions that prohibit states from requiring retailers who do not have a physical presence in a state to collect that state's sales tax. The Court argued that to do so would hinder interstate commerce because the sales and use tax regulation of the more than 7,500 jurisdictions would constitute an "undue burden" on retailers.

"When the federal moratorium on state and local taxes on Internet access expires next November, Congress will have to address the issue of state sales taxes on electronic commerce," says Illinois Senator Steve Rauschenberger, cochairman of NCSL's Task Force on State and Local Taxation of Telecommunications and Electronic...