With the election of a new president, officials in many states are hoping a renewed federal/state partnership will jumpstart the troubled economy. Until the new president takes office, however, falling revenues have prompted some states to take actions that are counter-productive rather than counter-cyclical.
States are in a tough spot. For example, Illinois officials predict a revenue hole this fiscal year of
$800 million or more
. The Center for Budget and Policy Priorities (CBPP) projects state budget shortfalls across the nation will total
in fiscal year 2010.
Since every state but one must balance its budget, without federal support lawmakers must raise taxes, cut services, or both. (Outright fiscal irresponsibility—e.g., failing to pay Medicaid bills, underfunding state employee pension funds—is another option: Illinois’ unpaid bills could top
by early 2009.)
New York Governor David Paterson has just proposed school and health care
funding cuts of $3.2 billion
over two years, similar to those that have
in other states. But CBPP economist Nicholas Johnson argues cutting services and income supports
makes the economy contract even more
as the purchasing power of struggling families falls.
Johnson cites the work of noted economists Joseph Stiglitz and Peter Orzag. They argue tax increases, by reducing savings and not just consumption, are less harmful to a depressed economy, especially when they fall mainly on wealthier taxpayers.
While some states have
enacted such tax increases
or closed loopholes,
have instead considered tax cuts. Yet tax cuts are the least effective way to stimulate state economies in a recession. They can lead to further
while reducing the buying power of public employees. Fortunately, voters in several states have
the tax cut mantra.
States would be better off
strengthening consumer demand
by extending unemployment insurance, preserving healthcare coverage, preventing foreclosures, and speeding up already scheduled public works projects. The federal government could help by providing grants, paying a larger share of Medicaid costs, and rescinding (or actually funding) burdensome, federally-imposed
that cost states nearly $34 billion in the last fiscal year.
States can help themselves by better tracking, targeting or terminating largely unmonitored business incentives and tax giveaways like
Single Sales Factor
. They could adopt comprehensive unified economic development budgets (UDB), like the
proposed for Kentucky. While more federal support is needed, states can use the recession to make their own economic development spending less wasteful and more productive.