By Catherine Hubbard, CCH Washington Staff Writer

Despite a concerted effort during 2003, states probably won't be ready until next year to implement the Streamlined Sales Tax Project agreement, according to Ray Scheppach, executive director of the National Governors Association (NGA).

"We're not ready," he told reporters following a meeting of the National League of Cities (NLC) in Washington, D.C. on September 2, 2003. He said that a few more states need to sign onto the agreement in order for it to be implemented, predicting that enough states might enact conforming legislation early next year to put the agreement in place.

As of July 29, 20 states had enacted conforming legislation, according to the NGA. The agreement becomes effective once at least 10 states, representing 20 percent of the population of the states with sales taxes, pass complying legislation. Although there are enough states participating, the states still don't represent 20 percent of the population.

States, Localities Turning to Tax Increases

Gaining control over Internet taxes would be one way to help resolve the growing revenue shortfalls states face each year. At the meeting, several mayors complained that unfunded federal mandates are driving up the costs of running the cities and making it impossible to balance state budgets.

NLC second vice president, Mayor Anthony Williams (Washington, D.C), said unfunded mandates frustrate cities. Although many leaders agree with the principles of the No Child Left Behind Act, for instance, they must decrease services in other areas or raise taxes to fund them, he said. As a result of a declining revenue base and unfunded mandates, taxpayers in D.C. are paying more money for less services. "Taxes are high because they're not spread across a wide enough base," he told the group.

Scott Pattison, executive director of the National Association of State Budget Officers, noted that states are in the worst fiscal crises since the 1940s. They will have to use all of the tools they can to balance their budgets, including general tax increases, cigarette tax increases and cuts in local aid. In turn, more localities will be forced to increase property taxes, he added.

Localities Face Unprecedented Revenue Decline

According to a NLC analysis released at the meeting, state revenues provided to cities actually declined in 2003 through 2004 by over 9 percent. That's a dramatic shift from historical trends. Usually, the rate of revenue growth merely slows during economic downturns. "The decline in revenues in 2004 points to the depth of the state-local fiscal crisis," said the NLC.

The NLC also found that:

• Cuts in state revenues for cities were reported in 24 states in 2003 and 2004.
• In 13 out of 16 states where revenues for cities were not cut, revenues grew at a rate of less than 3 percent.
• Cities experienced a 9.2 percent decline in state revenues between 2003 and 2004, totaling $2.3 billion.
• Since 1977, federal revenues as a share of total city general fund revenues have declined from 14 to 5 percent.

The leading states driving the decline in state revenues include California ($1.1 billion decline in 2003 through 2004), Massachusetts ($400 million), Florida ($136 million) and Minnesota ($110 million). Some cities saw programs eliminated or radically reduced, said the NLC. Furthermore, some states, such as North Carolina, Alaska and West Virginia, saw declining revenues before 2003.

Not all cities are affected in the same way by declining state revenues. Cities in Massachusetts experienced across-the-board cuts in state revenue programs. Alaska, Kansas, Minnesota and Washington, among others, experienced cuts in revenue-sharing programs. California cities lost more than a billion dollars in state revenues provided as a backfill to previous take-aways.

In some cases, states have cut revenues for cities, but also allowed them to raise taxes. For example, in North Carolina, the elimination of local tax reimbursements was coupled with the authority for counties to levy a sales tax. When Minnesota recently cut state aide to cities, it also authorized them to raise up to 60 percent of the lost revenues through local property tax increases. "The extension of local tax authority is a positive development," the NLC said. However, it added, local officials now face the political difficulty of raising taxes.

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