Overview
Partisan, election-year jockeying will reach heightened levels in the 46 legislatures scheduled to meet in regular session this year as the political stakes are high, money is scarce and recession-weary voters blame their elected officials for many of their economic woes. All major legislative decisions in 2012 will be made by lawmakers with one eye focused on the issues before them and the other on the elections scheduled for November 6th.
Legislators will tackle familiar issues in 2012; taxes and spending will again be divisive and produce the most contentious debate. While the overall revenue picture for states has brightened for some and others actually projecting a surplus, at least 17 states project budget gaps for the next fiscal year, while a handful need to balance budgets in the remaining six months of the current budget year. The revenue of all 50 states combined remains $21 billion below 2008 levels, according to a report jointly issued by the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO) late last year.
A Tea Party-led insurrection in the 2010 elections gave the GOP control of both chambers in 25 states. Democrats control just 16 and eight states are divided. Nebraska has a non-partisan unicameral legislature that is viewed as Republican. With conservative, GOP leadership in both houses in half the states, it is not surprising that legislators’ election-year approach to balancing budgets will involve more fiscal belt-tightening and just a very few tax increases.
In late December, our analysts surveyed the 50 states to determine which might consider raising taxes after four years of declining revenues and in many states deep budget cuts. California, Maryland and Washington are the only states so far where the governor or the leadership have indicated they actively plan to discuss tax increases. Others may consider tax hikes as a necessity as their sessions unfold and revenue projections change, but few lawmakers are willing to discuss them now.
Our research showed Alabama, Alaska, Florida, Georgia, Idaho, Illinois, Iowa, Kansas, Maine, Massachusetts, Minnesota, New Mexico, Oklahoma and Utah plan to discuss tax decreases, credits or incentives. Lawmakers in Alabama, Florida, Idaho, Illinois, Iowa, Michigan, Minnesota, New Mexico, South Carolina and Utah have said they will debate tax changes that would specifically affect businesses.
Click here for a simple, 50-state chart with this report that gives the reader a snapshot of what is projected to be discussed on taxes and spending in each state in 2012.
Several other familiar issues will resurface in statehouses this year. After a brief discussion below of taxes and spending we outline the other contentious issues including: health care reform, immigration reform, pension reform and voter ID. We have also prepared a short section on the 2012 elections.
Taxes and Spending
The nation’s economy and state revenue projections have improved slightly but the overall economic picture for two-thirds of the states remains tough. Budget gaps in states projecting shortfalls in fiscal year 2013 are estimated to total $40 billion. This is a tough pill for lawmakers to swallow but a dramatic improvement over recent years. By comparison, California alone closed a deficit of $42 billion in 2009, during the height of recession.
Tax revenue is not expected to grow enough to make up for the impact of four years of dismal economic times. Additionally, the federal stimulus program that propped up state budgets has ended. Rainy-day funds, internal transfers and other one-time sources have largely been tapped, so governors and lawmakers must look for new places to cut spending.
States will again be required to consider cutting once sacrosanct programs like education and Medicaid to balance their budgets. The two programs account for about 43.7 percent of all state general-fund spending in FY 2011, according to the NGA/NASBO report. Additional Medicaid cuts could provide states very short term relief. The pressure to actually increase Medicaid spending could climb dramatically in 2014 when major portions of the federal Affordable Care Act take effect.
Lawmakers find election year tax increases very unattractive. More than 30 states have raised taxes since the recession began in 2007, but some of those increases were temporary and will expire soon.
The states that are considering increases are doing so cautiously.
California Democratic Gov. Jerry Brown faces a projected $13 billion shortfall and wants to increase taxes to raise an additional $7 billion annually through 2016. Governor Brown has proposed a 2012 ballot initiative that would boost income taxes on individuals making $250,000 or more a year and would increase the state sales tax by a half-cent.
A panel of Maryland state lawmakers has recommended that Democratic Gov. Martin O’Malley slash the state’s structural budget deficit in half, in part by raising taxes and consumer fees to fill a $1.1 billion gap for next fiscal year. Governor O’Malley is weighing tax increases on millionaires and corporations, as well as a steeper gas tax that has not been raised in several decades. Taxes on Internet sales and cigars, among other consumer products, are also being considered.
Washington’s Democratic Gov. Chris Gregoire has proposed hiking the sales tax by a half a cent to raise nearly $500 million a year in an effort to eliminate a projected $1.4 billion shortfall. Lawmakers took a serious step towards a balanced budget in a special session last month. Governor Gregoire had called for $2 billion in changes and a fully revamped budget by Christmas, but lawmakers settled on a plan that provides a $480 million fix through a combination of cuts, transfers and delayed payments.
Now Gregoire has asked for the sales tax increase to finish the job. She has proposed that the tax expire after three years.
Democratic leaders have struggled to find business support for recent tax proposals. The income tax was defeated last year, with opposition from Boeing and Microsoft. Voters also repealed taxes on soda, candy and other items. The lame-duck Democratic governor has some business support for her plan this year, according to reports in the News Tribune, because businesses are concerned that deeper cuts in state education programs will lead to a less-qualified work force.
Not every state is still in trouble; several are well on the way to financial recovery. A year-long review of fiscal and economic data in all 50 states conducted by The Associated Press found 15 states had budget surpluses as they headed into the current fiscal year. They ranged from Mississippi, where the $6.6 million surplus represented less than one percent of general fund spending, to Wyoming, where the $437 million surplus was equivalent to 28 percent of the state’s general fund.
Resource-rich Alaska took in nearly $1.9 billion more than expected last fiscal year and ended the fiscal year with an estimated $260 million surplus, an amount equal to nearly four percent of its general fund. Other energy rich states including West Virginia and North Dakota are also flush with cash. They have responded by reducing their corporate income tax rates. Unemployment in many of the states running surpluses has been well below the national jobless rate of 9.1 percent. North Dakota’s rate, for example, was 3.5 percent in September.
Health Care Reform
The federal requirement that states either establish health benefit exchanges or participate in a federal exchange by 2014 almost certainly will not be met. Several states will wrestle with health exchange and related legislation in 2012. Only 14 states agreed to create their own exchange in 2011 and Alaska, Florida and Louisiana publically refused to participate in the program. Other states have been unable to pass legislation or have simply decided to await the development of a federal exchange.
It is not certain that the Obama administration will get the federal exchange ready by the deadline either. The state and federal exchanges are required to begin enrolling members by the fall of 2013; coverage would begin in 2014. Federal officials have signed private contracts worth more than $150 million to develop the federal exchange. Oregon’s top insurance regulator, Teresa Miller, joined the U.S. Department of Health and Human Services (HHS) to oversee development of health insurance exchanges.
The federal and state exchanges would be a one-stop website where individuals and small businesses could compare insurance policy offerings on price, coverage and quality. The exchanges would also help applicants determine whether they are eligible for Medicaid or for federal subsidies or tax credits to help offset premium costs.
While the technical challenges to compliance appear daunting, the U.S. Supreme Court and the 2012 election could derail the process completely. The Court has agreed to review a challenge to the federal law; the Patient Protection and Affordable Care Act passed by Congress in 2010. The justices most notably will consider whether Congress was acting within its constitutional powers when it required all Americans to have at least a basic form of health insurance by 2014. Those who do not would be required to pay a penalty on their 2015 income tax returns. The court has been asked to decide whether other parts of the law can go forward if the “individual mandate” is found unconstitutional. The case is scheduled to be heard in March with a decision expected this summer.
If the President loses the election next fall, an effort to scrap the exchanges and the entire law will certainly be forthcoming. The Republican presidential candidates have all taken an oath to dismantle what they derisively call Obamacare and the exchanges. Even GOP frontrunner Mitt Romney, who created an exchange as governor of Massachusetts, has promised to scrap the program. He wrote in the conservative National Review last year that: “His (Obama’s) health-care bill is unhealthy for America. It raises taxes, slashes the more private side of Medicare, installs price controls, and puts a new federal bureaucracy in charge of health care. It will create a new entitlement even as the ones we already have are bankrupt. For these reasons and more, the act should be repealed.”
The Obama administration has sent $640.7 million in three rounds of grants to more than half the states since 2010 to help them comply with the mandates of the Affordable Care Act. Alaska, Florida, Kansas, Louisiana, New Hampshire, Oklahoma, South Carolina and Wisconsin have rejected federal funding.
The health benefit exchange is only one step toward compliance with the federal law.
States are also responsible for developing Health Information Exchanges, which are essentially information systems that contain electronic records to allow health care professionals easy access to patients’ health histories so they can avoid costly and dangerous errors and duplication of services. The federal government’s promotion of electronic health records has created financial incentives for medical professionals and hospitals that make meaningful use of certified electronic health record (EHR) technology. According to the Journal of Accountancy, a total of $19 billion in incentive payments is available for hospitals and physicians under Medicare and Medicaid programs. The incentives will be paid out over four years on a transitional schedule to hospitals and physicians that meet “meaningful use” criteria for the technology.
In 2011, nearly every state took steps to contain Medicaid costs. Escalating Medicaid costs will continue to be a drag on state budgets in 2012. Lawmakers are especially concerned about the expansion of Medicaid in 2014 dictated by the Affordable Care Act. Several states are experimenting with new approaches to paying providers, delivering health care and streamlining services for those eligible for both Medicaid and Medicare.
The federal law also requires states to establish an essential benefits package of services that will be made available on the exchange. The federal government is scheduled to announce early this year the minimum or “essential” benefits all states must require insurers to offer. HHS is accepting comments on essential benefits until January 31, 2012. Federal law requires individual and small group health plans to provide, at a minimum, 10 categories of benefits. According to American Medical News, HHS would allow states to set essential health benefits benchmark coverage based on one of four possible types of plan offerings: one of the three largest small-group plans in the state; one of the three largest state employee health plans; one of the three largest federal employee health plan options; or the largest HMO plan offered in the state’s commercial market. Currently, states mandate that insurers offer a wide variety of health services but there is little consistency from state to state. The degree to which the federal baseline requirements differ from a state’s laws will dictate how much effort lawmakers will spend on this issue in 2012.
Immigration
Immigration will return as a hotly contested issue in 2012. Several of the more punitive measures passed in the last two years are now being contested in federal court and some states are expected to take a fresh look at issues relating to illegal or undocumented workers.
More than 1,600 bills dealing with immigrants and refugees were considered in the 50 states last year, according to the National Conference of State Legislatures (NCSL.) Nearly half considered strict enforcement measures based on a controversial 2010 Arizona law. The most punitive parts of that law failed to pass in all but five states: Alabama, Georgia, Indiana, South Carolina and Utah.
The more restrictive measures passed in the last two years have been challenged in federal court and opponents have found some traction there.
A federal judge has issued an injunction halting the following four provisions of the Arizona law and the U.S. Supreme Court has agreed to hear the case:
- A section that requires Arizona state law enforcement officials to determine the immigration status of anyone who is stopped, detained or arrested.
- A section that makes it a state crime to violate federal statutes on alien registration.
- A section that makes it a state crime for any “unauthorized alien” to apply for or perform work.
- A section that gives Arizona state law enforcement officers the ability to make a warrantless arrest if they have probable cause to believe the person has committed an offense that could subject them to deportation.
In Alabama, a federal judge and the U.S. appeals court in Atlanta put on hold several provisions of that state’s immigration law, the strictest in the nation, including one that required schools to check the immigration status of new students.
In Georgia, U.S. District Judge Thomas Thrash, Jr. blocked parts of that state’s law, including a provision authorizing police to verify the immigration status of someone who cannot provide proper identification. “The apparent legislative intent is to create such a climate of hostility, fear, mistrust and insecurity that all illegal aliens will leave Georgia,” Thrash wrote in his June ruling.
A district court judge last month blocked a piece of South Carolina’s immigration law which requires law enforcement officials to check the immigration status of any suspect they believe may be in the country illegally.
The court challenges notwithstanding, several states including Florida, Kansas, Kentucky and Mississippi have all indicated they will push for more restrictive immigration laws in 2012.
Several 2011 bills related to the federal E-verify program. Georgia, Louisiana, South Carolina and Tennessee passed laws requiring businesses to enroll in the program to determine whether their employees are legal residents and eligible to work in the United States. They followed in the footsteps of 17 other states that require public and private employers to use the Internet-based system.
The immigration reform bandwagon was sidetracked in part by reform advocates supported by business owners in states like California and Florida that need the immigrant workforce.
California flatly rejected the E-Verify program and passed a law that bars city and county governments from requiring private employers to use it, unless it is required to receive federal funds or is mandated by the federal government. The California Dream Act also expanded eligibility for in-state tuition and non-state scholarships to students who may not have legal status but have attended high school in the state for at least three years, have graduated from high school, or are attending a college or university.
A group in Iowa believes the best way to eliminate unauthorized immigration is to authorize it by creating a legal and comprehensive guest worker program. A program called the “Iowa Compact” took its inspiration from a similar proposal that was adopted in part in Utah. Proponents argue the comprehensive guest worker program would diminish undocumented immigration greatly. The group added that many undocumented immigrants do not come to the U.S. legally because there is no legal avenue to do so. Utah, Iowa and others may try to eliminate the black market by allowing a legal one to exist.
Finally, Michigan’s Republican Gov. Rick Snyder wants to make his state more attractive to immigrants. He plans to ask the federal government for changes that will remove barriers to attracting immigrants to the state as part of his economic revitalization plan.
Pension Reform
State and municipal pension reform continues to be a priority for lawmakers still reeling from four years of recession, shrinking revenues and underperforming retirement fund investments. The PEW Center on the States last year reported that states’ unfunded pension and retiree health care liabilities amount to about $1.26 trillion.
In an effort to tackle the problem, the NCSL reported that in the last two years 40 states made changes to at least one of their retirement plans. But lawmakers worked within the framework of the existing system. States increased employee contribution requirements, revised cost-of-living adjustments and extended age and length of service requirements. New Jersey Republican Gov. Chris Christie won a major battle with public employee unions last summer when he drove a pension package through the Democrat-controlled legislature that was projected to save the state $130 billion in the next 30 years.
A more difficult battle will be fought in statehouses this year when some conservative lawmakers take on public employee unions and try to make public pensions look more like the retirement plans offered by private employers.
Most public pensions are defined benefit plans, meaning that an employee makes a contribution and the employer guarantees a specific payout, usually based on years of service and an income averaging mechanism, upon retirement regardless of the performance of the investment fund.
Most private retirement plans are defined contribution plans, meaning an employer’s annual contribution is specified but the payout is not. Retirement accounts are set up for participants and benefits are based on the amounts credited to these accounts through employer contributions and, if applicable, employee contributions plus any investment earnings on the money in the account. At retirement, the account balance is the employee’s retirement package.
Virginia Republican Gov. Bob McDonnell believes the Virginia Retirement System (VRS) is unsustainable and will support legislation this year that creates a 401(k)-style defined contribution program for state employees. Virginia’s $52 billion pension system is $19.9 billion short of meeting its obligations to retirees, according to official estimates. Market turmoil has left the commonwealth with less than 72 percent funding – down from nearly 107 percent funding in 2001.
Some states may consider a hybrid system; a less generous defined benefit plan for existing workers and defined contribution plan for new hires. A commission in Mississippi is recommending a three-year freeze on the three percent cost-of-living adjustments paid to Mississippi government retirees. It has also asked lawmakers to consider a long-term change in the rules for new hires of state and local government by adding a defined contribution component to the Mississippi Public Employee Retirement System.
At least one prominent Democrat is willing to consider the hybrid system. California Gov. Jerry Brown wants to increase the retirement age, require local and state government workers to pay more toward their pensions and retiree health care and place new workers into a hybrid plan that includes 401(k)-style accounts. California Republicans say the governor’s plan does not go far enough, while Governor Brown’s fellow Democrats were cool to the idea.
Predictably, California has a massive problem. The Stanford Institute for Economic Policy Research has reported the state’s pension shortfall has now reached $498 billion, a number $73 billion – or 17 percent higher – than it was only about 18 months ago.
Other states will consider legislation to further modify their existing program. Louisiana Republican Gov. Bobby Jindal plans changes based on the New Jersey model. Governor Jindal has proposed an increase in the state employee contribution from eight to 11 percent – a move that would save the state $24 million in an already cash-strapped budget.
Voter ID
U.S. Attorney General Eric H. Holder Jr. last month told a Texas audience that the Justice Department will aggressively review new voting laws that civil rights advocates say will dampen minority participation in the 2012 elections. Holder’s speech put the spotlight on what is a smoldering partisan dispute over race and ballot access. The Justice Department’s civil rights division is scrutinizing a series of new state voting laws that were enacted, largely by Republican officials, in the name of fighting fraud.
Thirty-one states require all voters to show ID before casting a ballot at the polls. In 15 of these, the ID must include a photo of the voter; in the remaining 16, non-photo forms of ID are acceptable.
Voter ID was a hot topic in 2011 with some 20 states considering bills. Kansas, Rhode Island and Wisconsin enacted new voter ID requirements. Bills were vetoed in Minnesota, New Hampshire and North Carolina. In Minnesota, supporters have vowed to pass a new bill that would bypass the governor and go to the voters for approval instead. This strategy is similar to what the Oklahoma legislature did in 2009 and 2010. Mississippi voters approved a citizen initiative proposing voter ID in November 2011; that constitutional amendment will require the passage of implementing legislation before it can take effect.
Both political parties have a lot at stake in this debate. It was the huge turnout of newly registered, young and minority voters in the 2008 election that helped propel President Obama to victory. In the 2010 election, when voting by such groups dropped off and enthusiasm among more conservative groups surged, Republicans won sweeping victories, winning or expanding control of many state legislatures and governorships.
The photo ID is the heart of the issue. Previously, voters were able to use other forms of identification, like bank statements, utility bills and Social Security cards. Proponents of the photo ID requirements, mostly Republicans, say they are necessary to prevent voter fraud that could cancel out the choices of legitimate participants. Opponents, mostly Democrats, say there is no evidence of meaningful levels of fraud and contend that the measures are a veiled effort to suppress participation by hundreds of thousands of eligible voters who lack a driver’s license.
Holder says President Obama wants a federal solution that would automatically register all eligible voters, bar state legislators from gerrymandering their own districts and create a federal statute prohibiting the dissemination of fraudulent information to deceive people into not voting.
Elections
The Presidency, 33 U.S. Senate seats, 435 U.S. House seats, 11 state governors’ races, two territorial governors’ seats and 5,979 state Senate and House seats are scheduled to be contested November 6th. Voters in all 50 states will trek to the polls. A full slate of elections will be held in 44 states but only federal races will be contested in Alabama, Louisiana, Maryland, Mississippi, New Jersey and Virginia.
Two years ago there were 37 races for governor; this year only eight Democratic and three Republican gubernatorial seats are scheduled to be contested. Democrats Brian Schweitzer of Montana, John Lynch of New Hampshire and Chris Gregoire of Washington will leave office due to retirement or term limits. Indiana Republican Gov. Mitch Daniels must step down due to term limits.
Democratic incumbents seeking reelection include: Jay Nixon of Missouri, Bev Perdue of North Carolina and Earl Ray Tomblin of West Virginia. Democrats Jack Markell of Delaware and Peter Shumlin of Vermont, one of only two governors serving a two-year term, have not formally announced but both have made it clear they will be a candidate.
Republican Govs. Jack Dalrymple of North Dakota and Gary Herbert of Utah are also running for reelection.
Indiana, North Dakota and Utah are expected to stay in Republican control. Delaware, Vermont and West Virginia races are expected to stay Democratic. Missouri, Montana, New Hampshire, North Carolina and Washington, all now held by Democrats, are currently considered to be toss-ups.
Washington’s Governor Gregoire is perhaps the most notable Democrat leaving office. She was an activist attorney general who was elected governor in 2004. She served two terms, much of it embroiled in bare-knuckled budget battles with the legislature. She surprised supporters last June by announcing she would not seek a third term. With more than five months to go before the official candidate filing deadline, both major parties have anointed favorites to succeed Gregoire: Attorney General Rob McKenna for the Republicans and U.S. Rep. Jay Inslee for the Democrats. McKenna has been the frontrunner in recent polls and if elected he would be the state’s first Republican governor since 1980.
Indiana’s Governor Daniels, a former George W. Bush administration official and Eli Lilly executive, served two terms. He was a fiscal and social conservative and briefly last year was considered an attractive candidate for the GOP Presidential nomination. U.S. Republican Rep. John Pence is the heavy favorite in a race that is also expected to include Democratic House Speaker John Gregg and Rupert Boneham, a Libertarian who was once a star on the TV show “Survivor.”
Historically, about 30 percent of all legislative seats turn over in a general election. The numbers have climbed slightly since term limits have forced politicians from office. Some 83 senators –including 35 Democrats, 40 Republicans and eight Independents – will be termed-out in 2012. About 172 state representatives – including 87 Democrats and 85 Republicans – will be forced to retire due to term limit restrictions in 2012.
