Jonathan Weisman of the Wall Street Journal has a good, explanatory piece today on state budget deficits and what Washington can do about it. The vast majority of states have cut basic services from enacted budgets and about half of all states have raised taxes to deal with unprecedented deficits. Here in Illinois, as I reported in my piece on the post-Blagojevich state government, there’s a $11.5 billion deficit and Gov. Pat Quinn says the only way to balance the budget is a 50 percent across-the-board income tax increase.

The Obama administration is generous in its loans to financial firms — it has followed through on the Bush administration’s $750 billion Treasury Dept. Troubled Asset Relief Program, and it has allocated a trillion dollars  in Federal Reserve loans. But while TARP funds have been extended to auto companies and even the insurance industry, there’s no plan to use them for states. Weisman writes that another stimulus bill might be needed — the first one gave $246 billion in emergency stabilization funds to states and that clearly wasn’t enough. But with the talk in Washington centered on health care reform, the political will is probably lacking to undertake a 2nd stimulus plan.

Another solution is for the Treasury and Federal Reserve to underwrite state bond offerings, an idea championed by Barney Frank, the chairman of the House Financial Services Committee. Here again, though, is another political problem: many Republicans from the states in dire straits don’t want federal assistance. As Frank points out, the Obama administration and Democratic leadership in Congress won’t waste political capital on a California bailout if California GOP lawmakers strenuously oppose it.

The consequences of this dilemma is that with the country at its worst unemployment rate in 26 years, basic state aid programs like cash for the unemployed and community health clinics are going unfunded.-MB

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