e 5 a e Budget C isis A d t e cono y

The worst recession since the 1930s has opened up large budget shortfalls in nearly every state. In 18 states, shortfalls exceeded one-fifth ofthe budget. Nationally, states addressed shortfalls for the current fiscal year (2011) totaling $125 billion.

46 States Have Faced Budget Shortfalls in FY 11 NH

MT NO
SO MA
wy RI
NE a
KS NJ
DE
OK MD
DC
TX HI

Shortfalls as snar of FYll G n I al Furnt e p nditures.

o er 20% 11%-20% Under 11% No Shortfall Reported

State Revenue Losses Far Exceed Other Recent Recessions

Percent change in state tax revenue since start of recession; adjusted for inflation

20
15
10
5
0
-5
-10
-15
0 -- 1981-82

-- 1990-91

2001 -- 2007-09

2

Years From Start of Recession

3

1

4

FlgUIe5 ~nt rou

Sowers: ~sus B~au Bureau

The main cause of states' budget shortfalls is the steep drop in tax receipts. State revenues typically weaken during recessions, as the incomes of residents and businesses decline and so they pay less in income, sales, and other taxes. But the revenue loss during this recession is much worse than the loss in recent recessions.

Me icaid
11-mo nnu 19
10
8
6
4
2
0
·2
2000 2001
Source: - rol ment 5 Ris·ng

t)

2002

2003

2004

200S

2006

2007

2008

2009

Uninsu

The recession is also squeezing state budgets by increasing residents' need for public services. For example, many people who have lost jobs or income because of the recession have become eligible for publicly funded health coverage through Medicaid. That adds to state costs.

Largest State B dge S

II in ea fisc I Y r, bit Ions Last recession

o

son Reco

/1

2010

20'11

-se

-100

-150

-200

-$45

The combination of shrinking revenues and rising costs has produced budget shortfalls that far exceed those in the last recession. These shortfalls are expected to continue through fiscal year 2012, despite recent signs that the recession may be ending, because revenues generally don't recover from a downturn until well after the economy begins growing again.

c

s i

Sate Se vices

EJde 'f o sab

K-12

Coli ges& Universities

43

H t:h

3

29

34

EmploY' S

44

To help balance their budgets, at least 46 states plus the District of Columbia have cut public services, despite rising need. The cuts are affecting all major areas of state services, including health care, help for the elderly and disabled, and education. Also, 44 states have reduced their personnel costs through layoffs, unpaid leaves, hiring freezes, or similar actions.

ruts alreadyeoa<ted in this tum.

State Tax ncreases

Sales Tax

Business Taxes

is<ellane0u5

Pef"Sonal Income Tax

ExdseTaxes

7

13

24

22

17

InCreaseS ena.ctrd 2008 nd 2009.

Since budget cuts alone aren't sufficient to close states' large shortfalls, a growing number of states have adopted a balanced approach that also includes revenue increases. Prominent economists have pOinted out that budget cuts are more harmful to state economies during a recession than properly structured tax increases, so it is good policy to use tax increases to fill a substantial portion of state deficits. Thirty-three states raised taxes in 2008 and 2009.

Sta e S ortfal s After Use of Recovery Ac Funds ( nc uding Aug st Ex e sio )

Budg ertfaus in

o

-50

-100

1 0

-$68

-200

2009

FY2010

FY2011

budget gaps after

ctand ion

fY2012

States would be imposing even larger budget cuts and tax increases if the federal government hadn't provided about $135 billion to $140 billion in fiscal relief through the Recovery Act, mostly in the form of increased Medicaid and education funding. The August jobs bill provided additional assistance of $25 billion. These measures have closed roughly 30 percent to 40 percent of state budget shortfalls so far. While federal aid has helped close state budget shortfalls and avert the loss of jobs, there is now a danger that the federal government could worsen the state fiscal situation (and the economy) by passing tax or spending policies that would increase shortfalls.

a~ corporate loophol

s to nude more servkes

and more Internet n ettens

o er xch

b

22

Inco tax

3

Df(ouple from ffcleral 41 t ch ng

s

SO DC

37

While Congress can help the states by providing more fiscal relief, states can also help themselves by adopting reforms that strengthen their tax bases. For example, few states have fully updated their sales taxes to reflect the shift of Americans' household spending from goods to services. Many states can also strengthen their corporate income taxes and personal income tax.

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