Connecting the dots between federal policies and state pain.

'DEFICIT-Wracked Maryland Calls It Quits: Citing mounting debt ... the state will shut down for good on August 31."

That headline appeared not in the Baltimore Sun but on the satirical Web site the Onion. For many Marylanders, however, it may hurt too much to laugh. The state's $1 billion budget shortfall has led to layoffs, higher taxes in more than haft its counties, and tuition increases of as much as 21 percent at public universities.

Maryland isn't alone. In total, the 50 U.S. states faced an aggregate budget shortfall of $53.5 billion as the beginning of their fiscal years approached.

At least 20 states have been forced to raise taxes to close the gap, COMMENTARY and more than 30 have raised fees on everything from cell phone usage and camping to marriage licenses and divorce filings.

There have been teacher layoffs across the country, and at least 11 states have made other education cuts, from kindergarten through 12th grade.

California, the poster child of state fiscal pain, saw an unprecedented downgrading of its credit rating to BBB because of its difficulties in closing a $38 billion shortfall.

'Drop dead'

In 1975, President Gerald Ford said he would veto a "bailout" of financially ailing New York City--prompting a famous New York Daily News headline, "Ford to City: Drop Dead."

If the News were to summarize the impact of President Bush's fiscal proposals, it might read, "Bush to States: Drop Dead."

Not only has the Bush administration never proposed may fiscal relief to states, but, as state tax codes are linked to federal laws, federal tax cuts since 200l have drained $2.5 billion from already starved state coffers in 2003 alone and will lower state revenues by Cuts: Budgets at u an additional $8.9 billion over the next two years.

The $20 billion in state assistance added to this year's tax cut package was done only after the Bush administration gave in so it could get must-have swing votes for its tax relief bill.

This raises two important questions. Does it make sense for a president supposedly trying to stimulate the national economy to allow so much fiscal contraction at the state level? If not, why have Democrats, so desperate to make the economy an issue, failed to inspire public outcry over this contradictory policy?

The answer to the fast question is clearly no. When demand is taking a hit in the 50 states, of course it hurts the national economy they make up.

According to Mark Zandi, chief economist at Economy.com, an economic forecasting and consulting group, fiscal contraction at the state level would more than cut in half any stimulative effect of recent federal tax cuts. Millions of taxpayers may actually end up paying higher taxes and fees.

In a look at state tax increases, the Wall Street Journal reported in June that while one Nebraska family was being flown to Washington to watch Bush sign tax-cut legislation that would give them $900 in tax relief, the state legislature was enacting tax increases that may more than wipe out that savings.

'Stimulus' proposals

The Progressive Policy Institute, a think tank affiliated with the Democratic Leadership Council, found that the typical middle-income family with a child in a state university had their full 2001 tax cut negated by the increases in state tuition. And it can't be helping consumer confidence--substantially below where it was when the recession ended in November 2001, according to the Conference Board--to have tens of millions of Americans waking up to newspaper headlines of state fiscal distress and teacher layoffs.

The administration claims that the states' fiscal woes are due to their own overspending and that bailing them out would only reward such irresponsible policy. These "moral hazard" issues are legitimate concerns, but the case here is not that strong.

State per-capita spending growth, it turns out, was lower in the 1990s than the previous five decades, and 90 percent of the increases were in education, health and prisons. But why has it been so difficult for Democrats to highlight this economic illogic? No doubt it's a tough task to get the media to connect the dots between federal fiscal policy and state fiscal pain in a news climate dominated by the Middle East and national security issues.

Yet Democratic lawmakers, presidential candidates and governors have been exceptionally weak at highlighting these tradeoffs. It's not too late for Democrats to do what they should have done 18 months ago: Propose a repeal of this year's tax cut for the top bracket to create a "Tax Increase and Education Cut Prevention Fund."

Democrats could then contrast a tax cut that benefits roughly the top one-half of I percent of households with a plan to prevent tax increases and education cuts affecting millions and millions of hardworking families.

Beyond fairness issues, Democrats could stress that this plan would go to people more likely to spend the money and pump more demand into the economy and start addressing the 3.2 million private-sector jobs lost since 2001.

Gene Sperling, who was former President Bill Clinton's top economic adviser, is a senior fellow at the Council on Foreign Relations and a columnist for Bloomberg News.