Crisis at the state level

The Center on Budget and Policy Priorities:

States have enacted deep cuts in education, health care, and other important public services in their budgets for fiscal year 2012 (which begins July 1 in most states).

It is the fourth year in a row of budget-cutting for states, and the 2012 cuts are deeper than in past years. Of the 32 states that have enacted budgets, as least 24 are imposing significant cuts. These cuts will delay the nation’s economic recovery and undermine efforts to create jobs...

Only a few states raised revenue to help resolve their fiscal year 2012 budget shortfalls. Hawaii, for example, raised over $600 million in new tax revenue over the biennium by limiting tax exemptions for businesses and by eliminating the standard deduction and capping itemized deductions for higher-income individuals, among other actions. Illinois lawmakers enacted personal and corporate income tax increases to help address the state’s budget shortfalls for the current and upcoming year.

A few states made their problems worse by cutting taxes. Georgia, for example, enacted nearly $100 million in tax cuts, including $46 million to allow top income earners to claim unlimited itemized deductions on their income taxes. And Arizona reduced the corporate income tax rate and commercial property taxes, costing the state $38 million in fiscal year 2012, or 4 percent of the state’s 2012 budget shortfall.[3]

The cuts states have imposed since the recession began have impeded the nation’s economic recovery and cost hundreds of thousands of private-sector and public-sector jobs.

State and local governments have cut 535,000 jobs in education and other areas since August 2008 and are forecast to continue to cut tens of thousands of additional positions each month. In addition, deep cuts in funding for services create a cycle of job loss in the private sector. When schools, universities, health agencies, police departments, and other units of government cut their budgets, they cancel contracts with private vendors and eliminate or lower payments to businesses and nonprofit organizations that provide direct services...

Until now, federal assistance has lessened the extent to which states need to take actions that further harm the economy. The 2009 Recovery Act and the August 2010 jobs bill provided about $165 billion over a roughly 2½-year period to reduce the extent of state spending cuts and state tax and fee increases. But these funds nearly all expire at the end of June 2011. One way to avert the need for these kinds of cuts, as well as additional tax increases, would be for the federal government to reduce state budget gaps by extending emergency Medicaid funding over the period during which state fiscal conditions are expected to remain problematic. But such an extension appears to be only a remote possibility.

Moreover, federal policymakers are now considering some actions that could further deepen states’ fiscal problems in 2012 and in 2013 (for which states are also projecting budget shortfalls and therefore additional cuts). In pursuing deficit reduction, federal policymakers are considering deep cuts in discretionary programs, which would force significant reductions in federal support for services provided by state and local governments. Such actions would worsen state budget problems, deepen the size of spending cuts (and state tax and fee increases) and thus slow economic recovery even further than is already likely to occur.