Top 5 Issues in 2011: Fiscal & Economic
While fiscal concerns usually top the list of important issues for states—even in good economic times—over the next few years, the dialogue among state policymakers will almost exclusively be on the topic of money: budgets, federal assistance, taxes, spending, borrowing and, ultimately, surviving.
States have managed to close $170 billion in budget gaps since 2009, but the 2012 fiscal year is expected to be more extreme, with budget shortfall projections in excess of $140 billion.
The federal Recovery Act helped ease some of the pain of the recession and allowed states to minimize or delay cuts to some programs. The Recovery Act infused states with $224 billion for education, health care and entitlement programs—like unemployment benefit extensions—plus billions more for other projects. Now only $6 billion remains from those funds, and states will be straining to fill the gaps, especially in areas like Medicaid and transportation.
As states struggle to fund even the most basic programs in 2011, they likely will not be able to avoid increases in taxes and fees. Taxes topped the list of most popular ballot measures this election season—either raising them or capping them. States are taking a closer look at:
- Business incentive programs: focusing more heavily on returns on investment
- Taxes on the highest income earners: reevaluating current rates
- Taxes on Internet sales or other out-of-state transactions: including the ongoing legal battle over the so-called Amazon tax
- Fees or temporary taxes
- Unemployment insurance tax rates
Reforming or reassessing tax structures: including sales tax exemptions in some states
In the last two years, nearly all states have made cuts to most major service areas and states will likely make more cuts to programs this year. The Recovery Act fiscal cliff will exacerbate funding shortfalls, especially in education and infrastructure, most likely resulting in more drastic cuts this year than last in those areas. For example, 75 percent of the nation’s school districts expect to cut teaching jobs in the 2010–11 school year due at least in part to the loss of stimulus funds. In addition, states may attempt to shift some cost burdens for programs onto local jurisdictions, such as juvenile and adult correctional expenditures and pensions for teachers.
Like the federal government, states have been forced to borrow to pay their obligations, whether it is from the federal government—like the more than $41 billion currently borrowed to cover their unemployment insurance programs—or through bonds and private loans. Over the next year, states will need to borrow money and will be concerned with paying it back as interest rate payments come due and as changing risk profiles threaten to increase the cost of future borrowing—both of which could affect the speed of recovery.