ECONOMIC MEASURES INDICATE 27 STATES NEED FEDERAL FISCAL RELIEF

Federal fiscal relief should be provided to the states that need it, according to a new report by the Center on Budget and Policy Priorities.  The report ranks all 50 states according to recent changes in three economic measures — employment, poverty, and housing foreclosures — and finds that 27 states are clearly in need of fiscal relief now.

States across the country face budget shortfalls totaling at least $36 billion for 2009.  To meet their balanced budget requirements, they will have to raise taxes and/or cut expenditures — both of which would reduce overall demand and thereby weaken the impact of the recent federal stimulus package.  Federal fiscal relief would limit the need for such actions. 

“Even as Congress and the Federal Reserve are pressing the gas pedal on the economy through their stimulus policies, states will effectively be putting on the brake through their budget-balancing measures,” said Iris Lav, the Center’s deputy director and co-author of the report. “Targeted fiscal relief would help address this problem.”

In the last recession, Congress provided states with $20 billion in fiscal relief. The National Governors Associations is currently calling for $12 billion in relief.

Fifteen States Experiencing Particular Distress

Table 1 lists the 27 states identified in the report as needing fiscal relief.  Virtually all of these 27 states are expected to have deficits in the coming fiscal year.

The report notes that fiscal relief could be expanded to encompass more or all states if the economic downturn becomes deeper and more widespread.

Criteria for Targeting Fiscal Relief Effectively

To determine which states are experiencing budget problems that are both significant and the result of economic forces largely beyond state control, the report ranked states according to three economic measures:

• Declines in employment, which strain state budgets by reducing both income tax revenue and consumption.

• Increases in the number of food stamp recipients, which are the single best early warning signal of increases in poverty.  A growing poverty rate puts pressure on state health programs and other programs for the poor and near-poor.

• Increases in the number of housing foreclosures, which reduce states’ sales tax revenues by depressing home-related purchases.

Fiscal relief could be delivered to states through Medicaid (as an increase in the federal matching rate), through a block grant to states, or — as in the last recession and as the governors have now requested — through a combination of the two, the report explains.

“Contrary to some predictions, the record shows that the fiscal relief provided in the last downturn didn’t cause states to behave irresponsibly in the expectation that they’d get more federal help in the next downturn,” said Lav.  “There’s no good reason not to provide targeted help now to the states that need it.”

The Center’s report, “Economic Data Can Be Used to Target State Fiscal Relief Effectively,” is available at http://www.cbpp.org/3-3-08sfp.

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The Center on Budget and Policy Priorities is a nonprofit, nonpartisan research organization and policy institute that conducts research and analysis on a range of government policies and programs.