Top 5 Issues in 2012 Expanded: Fiscal and Economic Policy

Since 2009, states and territories (“the states”) collectively have experienced budget shortfalls on a scale never before seen. The upcoming year will continue that trend, as states project shortfalls totaling more than $100 billion. Last year, some national economic indicators—like overall labor market conditions and household spending—experienced modest improvements, and those improvements likely will continue in 2012. Because state fiscal recovery traditionally lags national recovery, however, states will spend at least the next two years struggling to get back to pre-recession normalcy and prosperity. In the meantime, the dialogue among state policymakers will almost exclusively be on the topics of jobs and money.


  • Jobs, Jobs, Jobs
  • Federal Funding Instability
  • Medicaid Spending
  • Tax Reform and Revenues
  • Cut to the Bone

Jobs, Jobs, Jobs

As state leaders return to work, one question will undoubtedly be on their minds: What policies can we pursue that will help encourage job growth in our state NOW? Some states will continue overhauling their approaches to economic development, such as evaluating and reforming their business incentive systems and overall business tax climate, as a means to stimulate job growth in 2012. Others will look for opportunities to put people back to work through innovative workforce development strategies, regulatory systems assessments, and infrastructure development projects—particularly if federal funds become available.

Federal Funding Instability

The 2009 American Recovery and Reinvestment Act helped close as much as 40 percent of state budget shortfalls over the past few years and infused states with billions of dollars, which allowed states to minimize or delay cuts to some programs. Those federal funds have largely run out and the modestly improving revenue picture may not be enough to offset future losses. Political volatility in Washington, D.C., could threaten federal funding streams for education, infrastructure development, health care and entitlement programs—like unemployment benefit extensions—potentially leaving states to pick up the pieces at a moment’s notice.

Medicaid Spending

The end of Recovery Act funds will make 2012 another difficult year for countercyclical programs—particularly Medicaid—as demand for these services remains high and costs continue to grow. Medicaid will continue to be a major budgetary issue for states as overall health care costs and enrollment continues to rise, even before the expanded eligibility requirements of the Affordable Care Act are fully implemented. The Recovery Act provided states with an enhanced federal match for state Medicaid dollars, which has now expired, but the increased enrollment brought on by the recession has not dissipated. Expect states to continue to look for ways to control Medicaid spending and deliver services, such as managed care programs.

Tax Reform and Revenues

Collectively, state revenues started to rebound in 2011 and rainy day fund balances are slowly being restored, which should continue in 2012. Expect states to take a closer look at reforming or reassessing current tax structures, particularly sales tax exemptions in some states; fees or temporary taxes that may be expiring in 2012; and taxes on out-of-state transactions, including online sales. Raising, lowering or capping taxes will again likely top the list of most popular ballot measures this election season.

Cut to the Bone

Over the past several years, states have focused largely on cutting expenses rather than increasing revenues as a way to end the year in the black. The depth of the recent recession left states so low on revenue that even historically “sacred” areas of state budgets—like health care and education—saw significant cuts. While enacted 2012 budgets contain a 2.9 percent year-over-year increase in general fund spending, the amount is still $20 billion, or 3.1 percent, less than the pre-recession high of $687 billion in the 2008 fiscal year, according to data from the National Association of State Budget Officers. As revenues continue their modest rebound, expect states to re-evaluate some of the cuts made in recent years, especially in education.


See the rest of CSG's Top 5 Issues for 2012: