Majority of states face severe budget problems

STATE BUDGET TROUBLES WORSEN
By Elizabeth McNichol and Iris J. Lav
Center on Budget and Policy Priorities 6/29/09

The ongoing decline in tax receipts has worsened state budget problems. At least 48 states addressed or are facing shortfalls in their budgets for the upcoming year totaling $166 billion or 24 percent of state budgets. New data show a majority of states expect shortfalls in 2011 as well. Aggregate gaps through 2011 likely will exceed $350 billion...

...If revenue declines persist as expected in many states, additional spending and service cuts are likely. Budget cuts often are more severe in the second year of a state fiscal crisis, after largely depleted reserves are no longer an option for closing deficits.

The experience of the last recession is instructive as to what kinds of actions states may take. Between 2002 and 2004 states reduced services significantly. For example, in the last recession, some 34 states cut eligibility for public health programs, causing well over 1 million people to lose health coverage, and at least 23 states cut eligibility for child care subsidies or otherwise limited access to child care. In addition, 34 states cut real per-pupil aid to school districts for K-12 education between 2002 and 2004, resulting in higher fees for textbooks and courses, shorter school days, fewer personnel, and reduced transportation.

Expenditure cuts and tax increases are problematic policies during an economic downturn because they reduce overall demand and can make the downturn deeper. When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals.

In all of these circumstances, the companies and organizations that would have received government payments have less money to spend on salaries and supplies, and individuals who would have received salaries or benefits have less money for consumption. This directly removes demand from the economy. Tax increases also remove demand from the economy by reducing the amount of money people have to spend – though to the extent these increases are on upper-income residents that effect is minimized because much of the money comes from savings and so does not diminish economic activity.

The federal government — which can run deficits — can provide assistance to states and localities to avert these “pro-cyclical” actions...

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Posted by Chuck Bell at 6:17 PM