By Adam Hughes Budget Policy Analyst February 2005 There is something interesting going on in Indiana this year. Republican Governor Mitch Daniels, former Office of Management and Budget (OMB) director under President Bush, wants to institute a progressive tax for one year to help close Indiana’s $645 million budget shortfall. Daniels orchestrated the president’s massive first-term tax cuts while heading OMB. He has often been described as a true Reagan Republican, favoring lower taxes, smaller government, and a strong national defense. President Bush even coined the nickname “the blade” for Daniels, referring to his knack for cutting programs and taxes. But Indiana now faces a budget squeeze that has forced cuts in jobs and social services. Heavy industry and manufacturing have left the state. Younger works say there is little to keep them there. The state has a $600 million deficit and owes back payments of $710 million to schools, universities, and local governments. So Daniels announced in his first State of the State address he wants to raise income taxes on those making over $100,000 per year by one percent for just one year – certainly a tough choice given Daniels’ lifetime support of lower taxes. The federal fiscal situation is even worse than Indiana’s and we face many of the same difficult choices. Because of Bush’s tax cuts, the federal government now has a long-term structural fiscal problem. The U.S. has reached a point where the economy cannot grow enough to bring in sufficient revenues to put the budget into the black. Yet repealing some of the old tax cuts is not even being considered. In fact, the president wants those cuts extended permanently. Experts warn the problem will only get worse. Health care expenses are expected to rise close to ten percent per year over the next decade. Social Security only needs minor fixes to remain solvent, but revenue will need to be increased to avoid benefit cuts. And based on Bush’s inaugural address, it is fair to assume supplemental military spending will remain high for the foreseeable future. The president has repeatedly vowed to cut the deficit in half by 2009 and has often described his FY06 budget as a “tough” one. But what he means by “tough” is his budget cuts programs serving low- and middle-income Americans. These cuts include non-defense discretionary spending and also spending caps for entitlement programs like Medicaid and Food Stamps, and they will have a large impact on state budgets. Over the next five years under Bush’s FY 06 budget, Indiana would lose $220 million in elementary and secondary education, 122 million in vocational and adult education, $50 million for Head Start and programs serving abused and neglected children, $4.3 million for heating and cooling assistance through the LIHEAP program, and $167.4 million for community development funding. Bush’s budget would also mean 11,000 fewer families could receive food and nutrition assistance, 6,600 would lose their housing voucher, 4,600 children would kicked out of child care. In total, Indiana will receive almost $1.2 billion less from the federal government. These cuts will undoubtedly be tough for the multitude of Hoosiers who depend on those programs for support. What is not tough about the budget is the president has not asked those who can afford to pay a little more to do so, as Governor Daniels bravely did. Currently, 57 percent of the federal deficit is due to the massive 2001 and 2003 tax cuts. Repealing those cuts on only the richest one percent of Americans (those making above $1 million per year) would bring in enough revenue to make Social Security fiscally solvent for 75 years. Considering this, the president’s preference instead to cut health care and nutrition programs for millions of low-income children and families is hard to understand. Governor Daniels’ budget was not without its own spending cuts (to Medicaid and education for example). But what is different – and courageous – is Daniels’ request that all Hoosiers help shoulder the burden, if only a little bit. President Bush should take a lesson from his old budget director about how to be tough on budgets. Cutting programs serving low-income populations to reduce a deficit caused mainly by tax cuts to the richest people in the country is not tough at all – it is callous and cowardly. It may be the easier way, but it is the wrong way.