Tax and Budget

Worst case scenarios abound if Congress fails to extend for another six months the enhanced Medicaid match begun by the 2009 stimulus. CSG’s recent survey found that over half the states have already counted on the extension, from January 1 until June 30, 2011, in their budget deliberations for FY 2011. The Senate appears poised to put the extension back in the so-called “tax extender” bill next week.

Contrary to the claims of many pundits, voter initiatives have not constrained the California budget to the extent that fiscal crises are inevitable. I reach this conclusion by examining each of the 111 successful initiatives in the state’s history. For the 2009-2010 budget cycle, voter initiatives locked in about 33 percent of spending, most of which probably would have been appropriated even if not required, and placed no significant prohibitions on the two primary sources of state revenue—income and sales taxes.

States and municipalities borrow hundreds of billions of dollars every year through the bond market. In 2008-09, upheaval in U.S. financial markets changed the way governments could borrow money to finance infrastructure building and other activities. State treasurers and other officials responded by changing how they market and package their bonds in order to keep funds flowing to vital projects.

Fiscal conditions rapidly deteriorated for states in the 2009 fiscal year as the nation remained in a prolonged economic downturn. States experienced unprecedented declines in both revenues and state spending, while rainy day fund levels sharply declined from the 2008 fiscal year. While the national economy may be slowly recovering, conditions have not improved for states in the 2010 fiscal year. State spending is projected to be negative for the second year in a row. Revenue collections remain weak, with total collections declining for a record five consecutive quarters. The state fiscal outlook is expected to remain grim in fiscal 2011 and beyond as Recovery Act funds decrease and revenues are slow to recover.

For those in the industry of government accountability, the term “unprecedented change in 2009” is an understatement. With the enactment of the American Recovery and Reinvestment Act of 2009, government financial management professionals embarked on a monumental undertaking: using existing limited resources to quickly develop a new, efficient, Web-based system of reporting and accounting for federal grant funds. Everyone recognized the enormity of the task; no one, however, could have foreseen the extraordinary levels of intergovernmental cooperation that would emerge.

States’ fiscal environments continue to feel the devastating effects of the recession, even though many economists have concluded the recession ended last summer. Economic output—gross domestic product—rose during the third quarter of the 2009 calendar year, albeit at a modest 2.2 percent annual rate, and the economy is expected to continue growing. But state tax revenues have not shown evidence of an expansion as revenues are still falling in many states, and it will likely be a number of years before tax revenues recover.

With the notable exception of health reform, it’s hard to find a more politically charged topic in 2009 than the American Recovery and Reinvestment Act, better known as the stimulus. For proponents, it is the bullet that brought down the Great Recession. For opponents, it is an $862 billion boondoggle that failed to deliver the jobs America needs.1 The public verdict is clear with polls showing up to 75 percent of Americans think the stimulus has done little or nothing to help them personally.2 The view from the states, however, is much more complicated.

During times of recession, businesses cut back because of a lack of demand for their products, but not so for state governments. As states are losing revenue and having to make do with less—residents hit hard by the down economy often need government services more.

With falling revenues, unprecedented declines in state spending and a national unemployment rate hovering around 10 percent, states face limited options for deficit mitigation as they enter into what will likely be one of the worst budget years since the Great Depression. Facing combined budget gaps exceeding $130 billion over the next two years, along with significant increases in Medicaid spending, this session provided state officials with an overview of the policy responses required to enact transformational changes delivering services as well as options available for deficit mitigation.

E-newsletter Issue #47 | May 27, 2010
 

Renowned economist Arthur Laffer had a simple message to attendees at The Council of State Governments’ Economic Summit of the States:

“If you tax people who work, and pay people who don’t, don’t be surprised if you find a lot of people not working,”  Laffer said on the closing day of the summit May 23.

Pages