FOR IMMEDIATE RELEASE:
Sunday, September 9, 2001
CONTACT: Jim Jaffe, Michelle Bazie
HOW WELL ARE STATES COPING WITH THE SLOW ECONOMY AND STRUCTURAL BUDGET PROBLEMS?
PDF of press release
HTML of full report
PDF of full report
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With budgets squeezed both by the current economic downturn and, in many cases, by longer-term structural problems, states are responding with a mixture of short-term fixes, spending cuts, and tax increases, according to a new study from the Center on Budget and Policy Priorities.
The Center's study, State Responses to Tight Fiscal Conditions, looks behind the data on how states are faring in the slow economy to examine how states' budgetary responses could affect their fiscal stability if a robust economic recovery does not occur soon. It also provides a more in-depth look at four states Indiana, Minnesota, Texas, and Virginia to illustrate the range of issues states are facing and the range of policies they have adopted.
"If the slowdown continues or deepens, more and more states will face budget shortfalls and problems in states already affected could intensify," noted Kevin Carey, a Policy Analyst with the Center's State Fiscal Project and lead author of the report. He added that this year's federal tax cuts will worsen states' fiscal situation by reducing revenue from state income and estate taxes and possibly requiring cuts in future federal grants to states.
"With all these uncertainties, it's important to examine whether states are handling the slowdown in ways that won't cause bigger problems later especially for low-income and other vulnerable populations, which often are the hardest hit by a weak economy," said Carey.
The budget imbalances some states face are temporary and reflect the slow economy. However, other states including Tennessee and Texas have structural problems: their tax systems don't raise the amount of money the state needs over the long term. (Some states face both temporary and structural problems.) Budget-balancing strategies that make sense for states with temporary imbalances could be ineffective or harmful for states with structural problems.
In particular, short-term fixes are a popular alternative to raising taxes or cutting programs, and a number of states are using them to close fiscal gaps. At least seven states (California, Indiana, Kentucky, Michigan, Mississippi, Ohio, and Washington) have begun to tap state "rainy day" funds or other reserves to balance their budgets, for example. In addition, states such as Indiana, New Hampshire, Texas, and Virginia have used accounting gimmicks like artificially shifting expenditures to a later fiscal year or simply raising their revenue estimates without economic justification. "For many states, today's budget gimmick can create tomorrow's budget crisis," said Center Deputy Director Iris Lav, a co-author of the report.
The use of certain short-term measures such as drawing down rainy day funds or enacting temporary tax increases may be appropriate in some cases, enabling states to maintain vital services until revenue growth rebounds. However, if an economic slump is prolonged, or if the state's budget imbalance primarily reflects structural problems, these measures will only make it harder for states to balance their budgets in future years.
While some states are adopting short-term fixes to balance their budgets, seven states (Arizona, Indiana, Maine, Nevada, New Hampshire, New Jersey, and West Virginia) have raised revenues significantly. Mississippi, Ohio, and South Carolina have enacted across-the-board spending cuts, while Indiana and Kentucky have set the stage for cuts in Medicaid spending by appropriating less money than the programs are projected to require.
In some cases, states' budget problems highlight the need for better budget information. "Some states may have adopted tax cuts or spending increases in the 1990s without taking into account their ultimate cost," noted Liz McNichol, director of the Center's State Fiscal Project and a co-author of the report. "This made them more vulnerable to budget problems when the economy slowed." Such states, she added, should consider adopting budget process reforms to give policymakers and the public a clearer view of the consequences of policy choices.
A full text of the Center report, State Responses to Tight Fiscal Conditions, is available at the CBPP website, www.cbpp.org.
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. It is supported primarily by foundation grants.
State Group Contact List
Arise Citizens' Policy Project
P. O. Box 612
Montgomery, AL 36101
Indiana Coalition on Housing and Homeless Issues
324 W Morris Street
Indianapolis IN 46225
Pennsylvania Partnerships for Children
Deputy Director of Communications
20 N. Market Square, Suite 300
Harrisburg, PA 17101-1632
California Budget Project
921 11th Street, Suite 50
Sacramento, CA 95814
Kentucky Youth Advocates
Abby A. Hughes Holsclaw
624 Shelby Street
Frankfort, Kentucky 40601
(502) 875 4865
Tennessee Budget Project
2012 21st Avenue, South
Nashville, TN 37212
(615) 385-2221 ex. 23
Colorado Fiscal Policy Institute
623 Fox Street, Suite 300
Denver, CO 80204
Michigan League for Human Services
1115 So. Pennsylvania Ave., # 202
Lansing, MI 48912
(517) 487-5436 Ext.212
Center for Public Policy Priorities
900 Lydia Street
Austin, TX 78702
CT Voices for Children
Douglas Hall, Ph.D.
Senior Policy Fellow
33 Whitney Avenue
New Haven, CT 06510
Minnesota Council of Nonprofits
Director, Minnesota Budget Project
2314 University Ave W #20
St. Paul, MN 55114
Virginia Organizing Project
703 Concord Avenue
Charlottesville, VA 22903-5208
Idaho Center on Budget & Tax Policy
c/o United Vision for Idaho
1412 W. Idaho St.
Boise, ID 83702
North Carolina Budget & Tax Center
P.O. Box 28068
Raleigh, NC 27611
Wisconsin Budget Project of the Wisconsin Council on Children & Families
16 N. Carroll Street, Suite 600
Madison, WI 53703
(608) 284-0580 ext. 307
Voices for Illinois' Children
208 South LaSalle, Suite 1490
Chicago, IL 60604