Fiscal and economic recovery remains slow and painful for many states, as revenues struggle to get back to pre-recession levels while upward pressures on spending remain. Decreasing and increasingly unpredictable federal spending has put additional pressures on states, especially in the areas of health care and education. Labor trends have improved, but the severity of the recession has left its mark—long-term unemployment rates continue to be elevated, while labor participation rates hit their lowest levels in thirty years.
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About the Author
Jennifer Burnett is the Program Manager for Fiscal and Economic Policy at The Council of State Governments. Her areas of policy expertise include performance management, income trends, public employment, state budgets, unemployment and tax policy. She holds bachelor’s degrees in economics and finance from the University of Kentucky, a master’s degree from the Patterson School of Diplomacy and International Commerce and a juris doctor from the Salmon P. Chase College of Law.
State revenues started to collectively rebound in 2011 and 2012, while rainy day funds—also called budget stabilization funds (Table 7.1)—were being restored. According to the National Association of State Budget Officers,1 states overall can expect a similar pattern in 2013—slow, but relatively steady increases in revenue that track trends in the national economy. Estimated revenues in enacted 2013 fiscal year budgets are expected to increase by 3.9 percent over the 2012 fiscal year, although growth rates are uneven across states with 21 states still forecasting lower general fund revenues in 2013 when compared to prerecession level (Table 7.5).
Based on data from the U.S. Census Bureau,2
state government general revenue totaled $1.653 trillion in the 2011 fiscal year, which is an increase of 5.7 percent over the 2010 fiscal year (Table 7.21). Those revenues consist of four major categories:
Federal grants—34.7 percent
Service charges—11.0 percent
According to preliminary data from the Rockefeller Institute of Government,3 tax collections from 48 states increased by 5.7 percent in nominal terms in the last quarter of the 2012 calendar year compared to the same quarter a year before.
According to the Rockefeller Institute, however, this increase can be attributed primarily to taxpayers shifting income from 2013 to 2012 to avoid paying higher income tax rates as a result of the American Taxpayer Relief Act and, therefore, interpretation should be approached with caution. While the fourth quarter gains might be an anomaly, overall tax collections in 2012 (Table 7.4) continued the positive growth seen over the past three calendar years following five quarters of declines due to the recession.
taxes represented the largest single source of revenues across all state governments collectively, comprising 45.9 percent of general revenues totaling $757.9 billion. In 2012, tax revenue increased 4.5 percent over 2011.
In nominal terms, total state tax revenues reached pre-recession levels in 2011,after seeing year-over-year losses in 2009 and 2010. However, when adjusted for inflation, total tax revenues remain below their pre-recession levels. In 2012 dollars, states hit a high of total taxes collected in 2007 at over $841 million—around 5.5 percent less than taxes collected in 2012.
The primary driver for growth in total tax revenues in 2012 was income taxes, which contributed 62.0 percent of the increase. Gains in sales tax revenue contributed another chunk to overall gains (23.1 percent) along with severance taxes (11.1 percent). A decrease in year-over-year property tax collections detracted from the increase in total tax collections.
In 2012, the largest component of tax revenues were sales and gross receipt taxes—47.2 percent (Table 7.10) of total tax revenues. Within this category, general sales and gross receipt taxes take up the biggest chunk—30.5 percent of all taxes—followed by selective sales taxes at 16.6 percent of all tax revenue. Selective sales taxes include taxes on alcohol—0.8 percent of total taxes; insurance premiums—2.1 percent; motor fuels—5.0 percent; public utilities—1.8 percent; and tobacco products—2.2 percent (Table 7.5).5
After taking a hit during the recession, sales taxes have partially recovered, returning to pre-recession levels in nominal terms by 2011. From 2003 to 2007, sales taxes as a percentage of total tax revenue began to fall, starting at 49.9 percent in 2003 and ending at 46.0 percent in 2007. During and following the recession, that trend reversed and sales taxes as a percent of tax revenues grew—increasing 2.8 percentage points from 2008 to 2010. In 2011 and 2012 however, sales taxes started to fall again as a percent of taxes, dropping by 0.5 percentage points in 2011 and 1.2 percentage points in 2012, landing at a percentage closer to pre-recession levels in 2012.
The next largest component of tax revenue comes from income taxes at 39.5 percent. Income taxes come from two sources—individual income and corporate income—with the majority of revenue coming from individual income taxes. Individual income taxes (Table 7.12) make up 35.3 percent of all tax revenue, compared to corporate income taxes (Table 7.14), which make up 5.3 percent of revenue. Other significant sources of state taxes include licenses at 6.8 percent of tax revenue; severance at 1.9 percent; and property at 1.9 percent (Table 7.21).
After dropping during the recession, income taxes have partially recovered, returning to their pre-recession levels in nominal terms in 2012. From 2011 to 2012, income tax collections increased by 7.6 percent and from 2010 to 2011, they increased by 9.3 percent. During the recession, income tax collections fell significantly. In 2009, income tax collections dropped 13 percent and in 2010, by 4 percent.
Sales taxes and income taxes in 2009 and 2010 were actually mirror opposites of each other when it came to their changing contributions to total tax revenue. For example, income taxes as a percentage of total tax revenue fell from in 2009 and 2010 collectively by 3.13 percentage points while sales taxes increased by 2.8 percentage points over the same period. In 2003, sales taxes represented 50 percent of total tax revenue and income taxes represented 38.3 percent—a 11.6 percentage point gap. That narrowed significantly during the recession, reaching a low of 4.0 percentage points in 2008. Since then, the gap has increased again, hitting 6.6 percentage points in 2012.
Other significant sources of state taxes in 2012 included licenses at 6.6 percent of tax revenue; severance at 2.4 percent; and property at 1.6 percent (Table 7.21).
The second largest component of state revenues in 2011 came from federal grants—34.7 percent—a slight drop from 2010 levels, which stood at 35.5 percent, but up over 2009 levels of 30.4 percent. The largest components of state revenues from federal grants were in the category of federal welfare grants. These grants made up 58 percent of federal intergovernmental spending to states, an increase of 5.3 percent over 2010 levels. Federal welfare grants include spending on Temporary Assistance for Needy Families and Medicaid.
The second largest category of federal grants to states was in education, which stood at 18.2 percent of grants. State revenues from federal grants for education fell 0.9 percent from 2010, although federal spending in this category had been elevated in prior years due to an influx of funds from the American Recovery and Reinvestment Act. Revenues for highways at 7.7 percent and health and hospitals at 4.6 percent round out the other top categories of federal grants.
State government general expenditures totaled $1.65 trillion in 2011, an increase of 3.7 percent over 2010 (Table 7.23). When adjusted for inflation, however, the increase from 2010 to 2011 is less than 1 percent. On a per capita basis, state general expenditures in 2011 were $5,305, little changed from 2010 when per capita spending was $5,150.
Collectively, 80.1 percent of state general expenditures go to four major categories by function: education, public welfare, public health and hospitals, and highways. Education and public welfare made up 65.9 percent of spending in 2011. The next three largest areas for spending were health and hospitals at 7.6 percent, highways at 6.6 percent and governmental administration at 3.2 percent.
The percentage of total general expenditures for education has remained approximately the same over the past decade—around 36 percent. The percent spent on public welfare—which includes programs like Temporary Assistance for Needy Families and assistance for the elderly—has increased by 5.3 percentage points, moving from 24.8 percent in 2000 to 30.1 percent in 2011. Other categories like health and hospitals and highways also have remained relatively stable on a national level since 2000, although within states there is a lot more movement in how funding is distributed across categories.
Education—primary, secondary and higher education—is the largest functional spending category of state government spending (Table 7.23). States spent $592 billion in 2011 on education, or 35.8 percent of general expenditures. Education spending as a percent of general expenditures remained approximately the same from 2010 to 2011, but was down from 36.5 percent of expenditures in 2009. In 2011, Georgia spent the most on education as a percentage of general expenditures at 46.6 percent, followed by Indiana at 45.5 percent and Alabama at 45 percent. Thirteen states put 40 percent or more of total expenditures toward education in 2011. Five states—Alaska, Illinois, Maine, Massachusetts and Rhode Island—spent less than 30 percent on education.
Overall state spending on education increased 3.7 percent from 2010 to 2011. On a state-by-state basis, New York increased its spending on education by far more than any other state from 2010 to 2011—15.6 percent. Florida had the next biggest spending jump, increasing spending by 8 percent, followed by Arkansas and Alaska with increases of 7.5 percent. Twelve states decreased spending on education from 2010 to 2011.
For the 2009–10 school year, states and the District of Columbia spent $259.8 billion on public elementary and secondary schools (Table 9.4), or $5,277 per pupil.6 Vermont had the highest spending per pupil on public elementary and secondary schools for the 2009–10 school year, at $14,620 per pupil, followed by Hawaii at $11,617, Alaska at $11,104 and Wyoming at $10,053.
Public welfare is the second largest functional spending category of state governments (Table 7.23). States spent $496.8 billion on this category in 2011, a significant 7.1 percent increase over 2010 levels. Nationally, the percentage of general expenditures going toward the public welfare category also increased significantly, moving from 24.8 percent in 2000 to 30.1 percent in 2011.
State government spending on public welfare was the highest in Tennessee at 39 percent of general expenditures, followed by Rhode Island at 37.5 percent and Maine at 36.3 percent.
Fourteen states spent 30 percent or more of general expenditures on public welfare in 2011, while four states—Alaska, North Dakota, Utah and Wyoming—spent less than 20 percent on public welfare.
From 2010 to 2011, six states increased public welfare spending by 10 percent or more, with Idaho leading the pack with a 21.9 percent increase, followed by California with a 21.3 percent increase and Colorado with an 11.5 percent increase. On the other hand, six states decreased spending on public welfare, with Nebraska cutting spending 8.3 percent, the most by far, followed by New Mexico, with spending down 1.4 percent and South Dakota and Alabama, which each cut spending by 1.2 percent.
Medicaid spending falls between several Census categories of state general expenditures, including public welfare, health and hospitals. As a single program, Medicaid expenditures from all sources are estimated to reach $398.4 billion in the 2012 fiscal year; that represents a modest 1.2 percent increase over the year before, but a significant 10.8 percent increase over the 2010 fiscal year. Spending on Medicaid is estimated to account for 23.9 percent of total state spending in the 2012 fiscal year, up from 23.7 percent in 2011 and 22.2 percent in 2010.7
For the 2012 fiscal year, Missouri is estimated to have spent the largest percentage of total state expenditures on Medicaid of any state at 35 percent, followed by Pennsylvania at 33.3 percent and Arizona at 31.1 percent. Wyoming is estimated to have spent the least at 9.3 percent, followed by Oregon at 11.4 percent and North Dakota at 11.7 percent.
A majority of Medicaid funding comes from federal funds—62.7 percent in the 2011 fiscal year, with the remainder covered by state funding. While total Medicaid expenditures continue to increase, those increases have not been borne equally by states and the federal government. From the 2011 to the 2012 fiscal year, state funds for Medicaid increased by an estimated 16.2 percent, while federal funds actually decreased an estimated 7.8 percent. This uneven distribution is largely due to the end of enhanced federal funding—called FMAP funding—that was a part of the 2009 Recovery Act.
State Government Employment
The number of employees in state and local governments has been declining since 2008 and represents the largest contraction of public employment in more than 30 years. The loss of jobs in the public sector would have been much more accelerated had it not been for a marked increase in federal aid— primarily the Recovery Act, which helped preserve a significant number of state and local jobs for several years. Those funds are now gone and, while private sector employment has been recovering slowly, many state and local governments continue to cut the number of people they employ.
In past recessions, state and local government employment was quite stable as compared to private sector employment. Not so for the Great Recession, which began in 2007 and precipitated a downward trend in state government employment. According to the U.S. Census Bureau,8 state and local governments shed 218,367 full-time equivalent—known as FTE—positions from 2009 to 2010, or around 1.3 percent. From 2010 to 2011, state and local governments lost 223,178 FTE jobs, or a drop of about 1.4 percent. That’s nearly half a million jobs lost in two years.
Public employment in 33 states decreased between 2010 and 2011 (Table 8.3). Arizona, Indiana, Michigan, New Jersey and New York saw the largest declines, each losing more than 4 percent of their employees. When combined, New York (-48,656), California (-33,464) and New Jersey (-22,672) shed more than 100,000 positions. Arkansas, on the other hand, added 7.9 percent more employees to its workforce; that was the largest percent increase of any state. Seventeen states added employees in 2011, ranging from a high of 13,947 FTEs in Arkansas; 6,234 in Utah, a 4.4 percent increase; and 2,946 in Maine, a 4.1 percent increase. Seven of those states whose workforce grew added 500 or fewer FTEs.
Unemployment rates remained elevated in 2012, although rates have dropped since the Great Recession ended. In 2010, the national unemployment rate was 9.6 percent. Throughout 2011, the rate hovered around 9 percent, while the average rate was 8.1 percent for 2012. At the end of 2012, Nevada and Rhode Island had the highest unemployment rates, both hitting 10.2 percent. North Dakota reported the lowest rate at 3.2 percent. From December 2011 to December 2012, 19 states reported statistically significant changes in their unemployment rates, all of which were decreases. Nevada saw the biggest declines, dropping 2.8 percentage points; followed by Florida with a drop of 1.9 percentage points and Mississippi, which reported a decline of 1.8 percentage points.9
While unemployment rates are falling, characteristics of the unemployed remain fundamentally altered due to the recession. For example, the number of long-term unemployed—defined as those unemployed for 27 weeks or more—skyrocketed throughout the economic downturn. In 2011, the percentage of unemployed workers considered long-term unemployed increased significantly, hitting 44.6 percent in September—the highest percentage since the U.S. Department of Labor began calculating the rate in 1948. By 2012, the long-term unemployed rate stabilized and began decreasing slightly, hitting 39.1 percent in December. Individuals received unemployment benefits an average of 38.1 weeks in December 2012—more than double the average duration of unemployment when the recession began in December 2007.10
Labor Force Participation
Labor force participation rates—the proportion of the working age, civilian noninstitutional population that either has a job or is actively looking for one—hit 63.8 percent in February 2013, the lowest rate since February 1979. Participation rates, however, vary significantly by state. West Virginia, with a labor force participation rate of 54.4 percent, had the lowest rate in the country in February 2013, followed by Alabama at 57.4 percent and Arkansas at 58.9 percent. Nebraska had the highest rate in the nation at 72.9 percent, followed by North Dakota at 71.9 percent and Minnesota at 70.9 percent.11
The change in labor force participation rates since the recession began also varies by state. From February 2007 to February 2013, Utah had the biggest drop in its participation rate of any state, falling by 5.8 percentage points. Michigan and Hawaii were close behind, each falling 5.6 percentage points. Nebraska and Pennsylvania saw the smallest decreases in their participation rates, each shrinking by 0.3 percentage points, followed by New Jersey, which dropped 0.6 percentage points. No state over this period experienced an increase in their labor force participation rates.
Gross Domestic Product
Forty-three states and the District of Columbia saw an increase in real gross domestic product in 2011, a modest slowdown compared to 2010, with a national average increase of 1.47 percent. That’s compared to a 3.1 percent average annual increase in 2010. Each region performed differently, with several states posting more than a 4 percent gain and one state—North Dakota—posting a 7.6 percent gain. Most states fell between a 0.03 percent and a 3.3 percent growth rate from 2010 to 2011.12
Seven states—Alabama, Hawaii, Maine, Mississippi, Montana, New Jersey and Wyoming—experienced a drop in year-over-year GDP, each decreasing by less than 0.78 percent. Oregon, North Dakota and West Virginia each experienced big gains in GDP, all growing by 4.5 percent or more, with North Dakota posting a 7.6 percent increase over 2010. Durable goods manufacturing, professional, scientific and technical services, and information services were the leading contributors to real U.S. economic growth in 2011.
State personal income continued to increase in 2012, growing by 3.5 percent over 2011 (Table 10.4). That growth rate was slower, however, than in 2011, when income grew by 5.2 percent over 2010. On a per capita basis, personal income was $42,693 in 2012, an increase of 2.7 percent over the per capita rate in 2011 of $41,560.13
In 2012, Connecticut had the highest per capita personal income at $58,908, followed by Massachusetts at $54,687 and New Jersey at $53,628. The three states with the lowest per capita personal income in 2012 were Mississippi at $33,073, Idaho at $33,749 and South Carolina at $34,266. Growth rates in per capita personal income from 2011 to 2012 also varied significantly across states. Only one state—South Dakota—posted a negative growth rate over this period, while other states’ growth rates ranged from a low of 1.07 percent in Nevada and 1.19 percent in Delaware to a high of 9.9 percent in North Dakota and 3.8 percent in Ohio.
1. National Association of State Budget Officers’ Fall 2012 edition of The Fiscal Survey of States.
2. U.S. Census Bureau, State Government Finances Summary 2011. Note: 2011 is the most recent year for which the U.S. Census Bureau has released data on state government finances.
3. Lucy Dadayan and Donald J. Boyd, “State Tax Revenues Continue Slow Rebound,” State Revenue Report, The Rockefeller Institute of Government, February 2013.
4. U.S. Census Bureau, Annual Survey of State Government Tax Collections, 2011.
5. U.S. Census Bureau, Annual Survey of State Government Tax Collections, 2012.
6. National Center for Education Statistics, Digest of Education Statistics, 2012.
7. National Association of State Budget Officers, State Expenditure Report, Fiscal Years 2010–2012.
8. U.S. Census Bureau, Government Employment and Payroll, 2011.
9. U.S. Bureau of Labor Statistics, Current Population Survey.
12. U.S. Bureau of Economic Analysis.