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March 3, 2008
ECONOMIC DATA CAN BE USED TO TARGET
STATE FISCAL RELIEF EFFECTIVELY
By Iris J. Lav, Jason Levitis, and Elizabeth McNichol
States are experiencing major budget problems; more than half are projecting deficits for the coming fiscal year. To meet their balanced budget requirements, states will have to raise taxes and/or cut expenditures for services such as health care and education — actions that will deepen the nation’s economic problems and offset some of the effect of the recently enacted federal stimulus package by removing demand from the economy. To date, however, federal policymakers have shown some reluctance to enact federal fiscal relief that would lessen the need for states to take such actions.
Some of this reluctance stems from a concern that part of the federal aid would go to states that are not experiencing fiscal stress. This concern is reasonable. But it can be addressed by targeting fiscal relief to those states that are facing problems now. Should the economic downturn become deeper and more widespread, relief could be expanded to encompass more or all states.
This report uses three indicators — employment declines, increases in housing foreclosures, and increases in poverty (measured through increases in food stamp participation) — to identify states facing the greatest economic distress. It ranks each state separately on each of these three indicators, then averages the three rankings for each state to produce a single overall ranking of economic distress. (See box on p. 3 of the PDF)
By targeting fiscal relief to states on the basis of these three economic indicators, federal policymakers can be confident they are aiding states that are experiencing significant problems — and that these problems result from economic forces largely beyond state control. The indicators in this analysis suggest that there are 27 states that clearly are in need of relief now. The 27 states fall into two broad groups.
The 15 states ranked in this manner that show the most economic distress are Nevada, Minnesota, Rhode Island, Florida, California, Michigan, Delaware, Massachusetts, Ohio, New Jersey, Maryland, Arizona, Indiana, New Hampshire, and Illinois. Thirteen of these states are expecting budget deficits; in the remaining two (Delaware and Indiana), revenues for the current fiscal year are coming in below projections, and they may yet have deficits. In the 12 of these 15 states for which the size of the projected deficit has been quantified, deficits equal 9 percent of annual general fund expenditures, on average — a very large amount.[1]
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Moody’s Economy.com Recommends State Fiscal Relief
“Because most state governments are required by their constitutions to quickly eliminate their deficits, most are already drawing up plans to cut funding for programs ranging from healthcare to education and cutting grants to local government. Local governments are having their own financial problems; most rely on property-tax revenues, which are slumping with house prices. Cuts in state and local government outlays are sure to become a substantial drag on the economy later this year and into 2009.
“Additional federal aid to state governments would fund existing payrolls and programs and so provide a relatively quick economic boost. States that receive a check from the federal government will quickly pass on the money to workers, vendors and program beneficiaries.
“Arguments that state governments should be forced to cut spending that has grown bloated and irresponsible are strained at best. State government spending and employment are no larger today as a share of total economic activity and employment than they were three decades ago. Moreover, arguments that helping states today would encourage more profligacy in the future also appear overdone.”a
a The analysis can be found at http://www.economy.com/home/article_ds.asp?cid=102598 |
Eleven of the next 12 states ranked by economic distress (excluding North Dakota, whose ranking was likely affected by a change in the state’s food stamp rules, as noted below) are also expected to have deficits. The 12 states are Kentucky, Missouri, Wisconsin, Vermont, Mississippi, Connecticut, Pennsylvania, Maine, New York, Iowa, South Carolina, and Virginia.
It should be noted that these data inevitably lag actual economic conditions. The foreclosure rate data go through the third quarter of 2007; the housing situation has deteriorated since then and may be affecting other states. The food stamp numbers go through November 2007, and the employment data go through December. None reflect economic conditions in January 2008, when the economy appears to have weakened significantly. Thus, some states that do not show up in this analysis as having serious economic problems may do so in the future as more recent data become available.
 Click here to read the full-text PDF of this report (11pp.)
End Notes:
[1] For information about state deficits, see http://www.cbpp.org/1-15-08sfp.htm, which is updated regularly. |
