State government budgets are likely to feel the pinch if President Bush's proposed federal spending for fiscal year 2008 wins approval in Congress, AFT Public Employee budget task force members were told last month. Marcia Howard, executive director of Federal Funds Information for States, warned that with the exception of defense spending, FY 2008 federal spending will largely reflect 2007 levels.

Although Oct. 1 marked the start of FY 2008, the federal government is operating under a continuing resolution through Dec. 14 because of the budget impasse between the White House and congressional Democrats.

President Bush's proposed funding levels are below FY 2007, and states with budget shortfalls will be hit especially hard, Howard told the task force at its Nov. 13-16 meeting in Washington, D.C. Nearly 30 percent of all state spending comes from federal grants, Howard noted. Domestic discretionary spending—including most grants to states, excluding Medicaid, and the physical operation of the federal government—was $458 billion in 2007. President Bush's FY 2008 proposed budget called for $456 billion in domestic discretionary spending.

Interest on the federal debt registered at $239 billion in FY 2007. That number is expected to rise to $261 billion in 2008. "There is a Social Security surplus that masks some of the budget deficit," Howard warned, noting that in 2018, Social Security will collect less than it pays out.

"We're under investing in everything as a national policy," Howard said, noting that the United States ranks 23rd out of 25 industrialized countries in taxes collected as a percent of gross domestic product.

AFT lobbyist Bill Cunningham told the task force that despite the federal budget deficit and the shortfall of tax revenue, Congress is likely to take action that will further erode revenues even though demand for programs and services, including an estimated $1 trillion to take care of the country's veterans, remains constant.

Specifically, he said, extension of the Bush tax cuts will cost the federal treasury $1.4 trillion over 10 years, and elimination of the estate tax will cost $700 billion over 10 years. A fix to the Alternative Minimum Tax, which Democrats have pledged to address, carries a 10-year, $1 trillion price tag in foregone revenue. The AMT was implemented in 1969 to prevent wealthy taxpayers from using credits, deductions and shelters to avoid paying federal income tax. Because the AMT is not indexed to inflation, however, nearly 30 million taxpayers will be subject to the AMT by 2010, the Congressional Budget Office estimates. Two-thirds of those taxpayers with an AMT liability in 2010 will have gross adjusted incomes between $50,000 and $100,000.

The annual budget task force meeting was held in conjunction with the Center on Budget and Policy Priorities conference on funding state services conference.

November 30, 2007