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Blaming the Victim Won’t Solve State Fiscal Crisis

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Those who are blaming states for their severe budget shortfalls and arguing that Congress shouldn’t provide much-needed assistance until states “clean up their act” (here’s a recent example) are wrong on both counts.

The huge gap between what states need and what they have overwhelmingly reflects how badly state income, sales, and corporate tax revenues have collapsed in the recession. In fact, state tax revenues have fallen more in this recession than at any time in at least the past 45 years (the relevant data only go back to 1965).

States entered the recession with their largest budget reserves in history, totaling $69 billion or 10.5 percent of their general fund budgets at the end of fiscal year 2007. But the length and severity of the recession has depleted those reserves. In 2012 alone, state budget shortfalls are expected to be $120 billion.

And the suggestion that states are looking for the federal government to bail them out and solve all their budget problems instead of taking their own action ignores some basic realities.

  • Fiscal assistance from last year’s federal Recovery Act, which will largely run out by the end of December, has closed less than half of
    states’ budget shortfalls — 30 to 40 percent, on average. That was very helpful but hardly left states off the hook. States closed the rest mostly by
    using reserves, reducing services, cutting their workforces, and to some extent by raising revenues.
  • State and local governments have cut 242,000 jobs since August 2008. Last month they cut 10,000, and more job cuts are coming as most states
    started a new fiscal year on July 1 (see graph).

  • Over 40 states have cut back on services like education, health care, and help for the elderly to help balance their budgets. Overall, state general fund spending was $74 billion less in Fiscal Year 2010 than in Fiscal Year 2008, and as a share of the economy, state general fund spending has dropped 12 percent during the same period.
  • At least half the states have started to make money-saving changes in their pension or retiree health benefit plans.

To be sure, a number of states’ past policy decisions have added to their current problems, such as tax cuts they couldn’t afford — which contributed to the underfunding of pension systems — and a myriad of dubious “job-creating” corporate tax breaks. But even if states had acted flawlessly, this recession would have hit them hard.

To suggest that Washington should withhold assistance now is like refusing to put the fire out in a burning building until it’s brought fully up to code.