State taxes, philosophers, trial lawyers

A taxing time: Even as the federal government cuts taxes to stimulate the economy, the states are raising taxes for the first time in eight years, creating a drag on the overall economy.

With the nation's economic recovery still testing its footing, is this any time to be raising taxes? Certainly not, economists say. Yet that's precisely what states are beginning to do.

So why are states doing this? A little history explains part of the reason. In the 1830s, Midwestern states decided to copy the success of the Erie Canal and build their own waterways to connect agricultural producers to markets. When the Panic of 1837 occurred, overextended states defaulted, and citizens demanded limits on state indebtedness. This evolved into the requirement that nearly every state, unlike the federal government, must balance its budget every year.

So when personal income-tax receipts come up short, as they did in many states in April, governors and legislators had 2 1/2 months to close budget gaps before the end of the fiscal year and then come up with ways to pass a balanced budget for the coming fiscal year, which typically starts July 1. To avoid raising taxes, some states are slashing spending or taking other cost-saving steps that also slow the nation's economic recovery.

While the root of the problem may be more than a century old, more recent actions are to blame for the current crop of tax increases. In the late 1990s, Kansas, like many other states, had the luxury of ample surpluses. So lawmakers cut personal income-tax rates while at the same time ramping up spending on education.

In short, states are acting in a counter-countercyclical manner, says Bob Kurtter, a senior vice president in the public-finance group at Moody's Investors Service. During periods of economic expansion, states have excess revenue and lawmakers are under political pressure to cut taxes and spend more. Then, in times of economic weakness, states are forced to raise taxes and cut spending.

And bigger state-tax increases may be ahead. States used most of their onetime budget-balancing tricks this fiscal year, such as taking lump-sum payments from tobacco-litigation settlements intended to be spread out over 25 years. And so far, the economic recovery hasn't translated into much new hiring or a return to robust corporate profits, which means personal and corporate income-tax collections are likely to stay soft. As demands for health care and other state-funded services rise, as well as the costs of providing them, so will the pressure to raise taxes.

There have been some ideas advanced to ease states' woes for the next time around. One is to make state reserve funds larger.

William T. Pound, executive director of the National Conference of State Legislatures, isn't optimistic that there will be fundamental reform to the states' budget and tax structure. "The demands of the political system," he says, "are different than the demands of economic theory." -- Russell Gold

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The French finally attack: The following story, circulating on the Internet, is accurate, not true.

The cleanup portion of the ground war in Afghanistan heated up when the allies revealed plans to airdrop a platoon of crack French existentialist philosophers into the country to destroy the morale of the remaining Taliban zealots by proving the non-existence of God.

Elements from the feared Jean-Paul Sarte Brigade, or Black Berets, will be parachuted into the combat zones to spread doubt, despondency and existential anomie among the enemy. Hardened by numerous intellectual battles fought during their long occupation of Paris' Left Bank, their first action will be to establish a number of sidewalk cafes at strategic points near the front lines.

There they will drink coffee and talk animatedly about the absurd nature of life and man's lonely isolation in the universe. They will be accompanied by girlfriends who will spread further dismay by sticking their tongues in the philosophers' ears every five minutes and looking remote and unattainable to everyone else.

Humanitarian agencies have been quick to condemn the operation as inhumane, pointing out that the effects of passive smoking from the Frenchmen's endless Gitanes could wreak a terrible toll on civilians in the area.

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A comedian is not a man who says funny things. A comedian is one who says things funny. -- Ed Wynn

An audience is never wrong. An individual member of it may be an imbecile, but a thousand imbeciles together in the dark -- that is critical genius. -- Billy Wilder

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Trial lawyer trifecta: As John McCain kept telling us, campaign-finance reform was going to reduce if not end special-interest influence in Washington. Perhaps the senator forgot to tell the plaintiffs' bar, which is dominating the current congressional session as completely as any lobby ever has.

From asbestos-litigation reform to terrorism insurance to even the patients' bill of rights, the tort lawyers are blocking whatever they don't like. So great is their clout in the Senate that the lawyers are even inducing Democrats to kill their own self-professed priorities. Ed Hyman's ISI Group calls it the "trial lawyer trifecta," but even that understates their influence.

Take the patients bill of rights. Let's assume, generously, that this long-debated legislation is really aimed at the interests of patients. Democrats have claimed as much for years and their leader Tom Daschle made a show of passing it as one of his first priorities after regaining Senate control last year.

Yet talks between Senate Democrats and the GOP House fell apart recently over -- guess what? -- liability caps. North Carolina Democrat John Edwards, the nation's most prominent trial lawyer, is leading the charge against compromise. We don't mind if the bill fails as a result, since what it would really do is price more and more employers out of the market for health insurance by piling on mandate and lawsuit costs. But the failure is worth noting as an example of how Democrats put trial-lawyer priorities above all others.

The intellectual elite is already rationalizing the Democratic Party's trial-lawyer captivity, as in New Yorker writer Nicholas Lemann's recent massage of Edwards. Lawsuits, he writes, have become "the metaphor that does the political work for liberalism." Oh, please. -- From an editorial in The Wall Street Journal

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If we open a quarrel between the past and the present, we will find we have lost the future. -- Winston Churchill, after being sworn in as prime minister of England.

Gary Rust is chairman of Rust Communications.