Center on a Budget aa io P Priorities The State Budget Crisis And the Economy 46 States Have Faced Budget Shortfalls in ‘i 1 a D uA 4 ni ey DE ND Ms aL x ~ u AK Su Stontalsas sta of FY Gena anders sero Bi Over 20% 1 11%-20% | Under 11% | | No Shortfall Reported va jaa Source: (BPP survey. Paley ‘The worst recession since the 1930s has opened up large luuclget shorfalls in nearly every state In 18 states, shortfalls exceeded one-fith of the budget. Nationally, states addressed shortfalls for the current fiscal year (2011) totaling $126 balionState Revenue Losses Far Exceed Other Recent Recessions Percent change in state tax revenue since start of recession, adjusted for inflation 20 1s 10 o 1 2 3 4 Years From Start of Recession Floures represent four-quarte roling averages. Comoran Sources: Census Bureau and Bureau of Labor Statistics, Pag Soest molicy writes The main cause oF states’ budget shortralis is the steep drop in tax receipts. State revenues typically weaken during recessions, a9 the incames of residents and pusinesses decline and 90 they pay less in ineame, sales, and ether taxes. But the revenue las during this recession Is much worse than the toss In recent recessions Medicaid Enrollment Is Ri: 12-month annual growth rate (percent) 0 27% 8204 8 75% 6 4.5% = Ao 4 3.656 2 17% 1.196 ° 2000 © 200120022003, 2004S 20S 20052007 December of Each Year ‘Source Kaiser Commission on Medicaid and the Uninsured. The recession is also squeezing state budgets by increasing residents' need for public services For example, many peaple who have last jobs or income because of the recession have become eligible Tor publicly runded neath coverage through Medicaid, ‘That adds to state casts.Largest State Budget Shortfalls on Record Total state budget shortfall in each fiscal year, in billions Last recession 9 2m ms 2002s so $40 $45 a 100 “150 -200 Reported to date Source: CBPP survey, revised December 2010. The combination of shrinking revenues and rising costs has produced budget snortralls that tar exceed those in the last recession. These shartfalls are expected to continue through fiscal year 2012, despite recent signs that the recession may be ending, because revenues generally don't recover from a downturn until well after the ecoriamy begins grawing again Cuts in State Services Health Elderly & wera Colleges & Employees Disabled Universities 31 34 43 44 Budget cuts already enacted in this downturn, To help balance their budgets, at least 46 states plus the District of Columbia nave cut public services, despite rising need. The cuts are affecting all major areas of state services, including healtn care, nelp for the elderly and disabled, and education. Also, 44 states nave reduced their personnel casts through layoffs, unpaid leaves, hiring freezes, ar similar actionsState Tax Increases duct mamimometet tinea =e ‘cas = jie & 2p wT 13 wT 22 24 Since budget cuts alone aren't sumicient to close states’ large shertralls, a growing number at states have adopted a balanced approach that also includes revenue increases. Prominent economists have pointed out that budget cuts are more harmful to state economies during a recession than properly structured tax increases, so it is good policy to use tax increases to fill a Substantial partion af state dericits. Thirly-three states raised taxes in 2008 and 2009 State Shortfalls After Use of Recovery Act Funds (Including August Extension) Budget shortfalls in billions “1 Al is 150 $59 $68 200 Fy2009 Fy2010 Fy2011 Fro Budget gaps offset by mm Remaining budget gaps after Recovery Act and extension Recovery Act and extension Source CBPP analysis using data fiom U.S. Department of Health and Human Services re ai US. Department af Gducation, Congressional Budget Offic, and state budget documents. Pe Budgrt Revised September 2010 Prionti States would be imposing even larger budget cuts and tax increases if the federal government hadn't, provided about §135 billion to $1.40 billion in fiscal relief through the Recovery Act, mostly in the form of increased Medicaid and education funding. The August jobs bill provided additional assistance of $25 billian These measures have clased roughly 30 percent to 40 percent of state budget shartfalls so far While federal aid has helped close state budget shortfalls and avert the lass of jobs, there is now a danger that the federal government could worsen the state fiscal situation (and the economy) by passing tax oF spending policies that would increase shartfallsTax Reform Policy Options and Number of States That Could Benefit Close corporate 2 ar Income tax 37 loopholes a Broaden sales B = Ye Decouple from federal 41 tax base to include tax changes more services and more Internet transactions % Othertaxchanges 50 + DC While Congress can help the states hy providing more fiscal relief, states can also help themselvec by adopting reforms that strengthen their tachases. For example, few states have fully updated their sales taxes to reflect the shift of Americans’ househald spending from gaods ta services. Many states can also strengthen their corporate incame taxes and persanal income tax Priorities