Dos and Don’ts to Improve State Economies

Our new guide to state fiscal policies that can create jobs now and prepare states for long-term prosperity has four main recommendations:

1. Boost revenues and target investments to strengthen the economy. The deep cuts in education, health, human services, and other areas that states have imposed to close their recession-driven budget shortfalls are job killers.  They directly eliminate jobs in both the private and public sectors, and they indirectly cost other jobs by reducing consumer buying power.  Moreover, research shows, spending on education, transportation, and public safety is among the most important keys to economic growth and job quality in the long run.

   By limiting additional spending cuts and beginning to reverse past cuts, states can boost the  recovery and restore their investments in the future.  To help do so, states should boost their revenues through steps like raising taxes on high-income households and profitable corporations and expanding the sales tax base to include more services.  And they can free up funds for investment by scrutinizing all forms of spending — including spending in the form of tax breaks — to determine if they are cost-effective.

2. Avoid ineffective strategies and gimmicks that weaken the economy. A number of states have cut taxes for corporations or high-income people based on the misconception that these cuts would spur economic growth.  Other states are considering doing so.  These proposals not only would fail to produce the positive economic results that supporters promise, but also would make it increasingly difficult to pursue the policy options that do create jobs over the short and long run by draining revenues from state budgets.

   Similarly, arbitrary limits on revenue and spending (like Colorado’s Taxpayer Bill of Rights, or TABOR) and supermajority requirements for tax increases make it difficult for states to protect priority investments, especially during recessions.

3. Improve fiscal management. Strong fiscal management can help states to better gauge what they will need to sustain their most critical investments. That means creating mechanisms that will help policymakers make prudent and forward-looking spending decisions.

   For example, states should create effective “rainy day funds” — reserve funds designed to help states meet people’s needs during recessions — or improve the ones they already have to make them effective.  Also, states can help avert unaffordable tax cuts or program increases by adopting a “pay-as-you-go” (PAYGO) system that requires policymakers to fully offset the cost of proposed tax cuts or spending increases.

4. Protect the purchasing power of struggling families and children. The loss of purchasing power — particularly among poor and middle-class families, who are most likely to spend money locally — is one reason why state economies have been slow to rebound from the recession.  Poverty is costly in the long run, too, especially among children; poor children tend to do less well in school and earn less as adults.

   Thus, policymakers should redouble their efforts to keep struggling families from falling into poverty and avoid cutting supports that ease hardship.  For example, they should protect and expand state Earned Income Tax Credits, properly fund state unemployment insurance systems, and protect supports for the neediest families through the Temporary Assistance for Needy Families program.