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Economic News, Data and Analysis

States’ Troubles

A recent article by the Christian Science Monitor highlights some of the measures states are taking in response to their budget problems.
According to the Center on Budget and Policy Priorities, deficits are estimated to be between $70 and $85 billion for the upcoming state fiscal year (2004). Since most states have a balanced budget requirement, these states face immediate cuts in expenditures or increases in taxes.
The article above highlights some of the measures being taken, which include raising college tuition, closing libraries and other services early, and even unscrewing ever third light bulb in the Governor’s office (Missouri). In addition, almost half of the states have “raided tobacco settlement funds.”
Of course, there are more serious consequences as well. Since Medicaid is administered at the state level, several states are considering reducing health care aid to lower income individuals and families (see the CBPP report for details). Cuts in education, welfare, childcare, and even jury trials have also been enacted.
Is there a solution?
In the short term, states are in trouble without aid from the federal government. At the federal level, the government is allowed to borrow, and thus reduce the effects of a recession on spending and taxes. In fact, Bush has proposed increases in spending and decreases in taxes, the exact opposite of most states.
It makes sense that the federal government could play a roll in easing the states’ problems by providing aid in the form of grants, loans, or an increase in the federal share of certain services such as Medicaid.
In the longer-term, perhaps after the economy has recovered, there are several reforms that might help ease the impact of future budget shortfalls.
Alice Rivlin of Brookings suggests several reforms:

  • Enact counter-cyclical revenue sharing, i.e. federal assistance triggered by national or state economic indicators.
  • Accumulate larger “rainy-day funds” at the state level.
  • Insure that tax base includes less volatile revenue sources, such as sales taxes. (For example, a Virginia government economist posted that Virginia state revenue is more volatile than GDP, in part because of a reliance on capital gains and corporate tax revenues.)

State governments will face a test after the recession ends – will they be able to make hard choices in a boom to prevent another crisis from happening, or will they forget the lessons from the 2001 recession?

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Filed under: Economy, Fiscal Policy, Policy, State Economy

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