Now, together with the hundreds of billions in cuts, modest economic growth has improved the states' fiscal situation for the coming year, but only relatively speaking.
As Elizabeth McNichol, Phil Oliff and Nicholas Johnson at the Center on Budget and Policy Priorities conclude in the most recent edition of their on-going analysis of states' financial woes, they are digging out of a "very deep hole." Tax revenues grew by 8.3 percent in the 12 months ending June 2011, the fiscal year for most states. At that rate, it would take until 2019 before they will be back to the level they would have been had the recession not occurred.
And a steady recovery for the states is not necessarily in the cards even if the economy does continue to improve at the slow rate that it has been. For one thing, not only is there no more federal stimulus through American Recovery and Reinvestment Act passed in 2009, the federal government is also bent on cutting spending on some of the very programs that help states most during "normal" economic times. While income and sales tax revenues are rising, property tax revenues will remain low for years as a consequence of the burst housing bubble. And this is all taking place against a backdrop of more elementary, secondary and higher-education students to educate, more Medicaid patients to cover because of lost jobs and the crumbling of infrastructure caused by failure to invest when budgets were comparatively plush.
Twenty-nine states are seeking to close projected budget gaps of $47 billion for fiscal year 2013 with more cuts and, in a few cases, tax and fee increases. For 2012, 42 states hacked $103 billion from their budgets to avoid shortfalls, according to the CBPP:
The roughly $47 billion shortfall that states are facing for fiscal year 2013 equals about 0.31 percent of GDP. Assuming that economic activity declines by one dollar for every dollar that states cut spending or raise taxes, and based on a rule of thumb that a one percentage point loss of GDP costs the economy 1 million jobs, the state shortfalls projected to date could prevent the creation of 308,000 public- and private-sector jobs next year.That's not all. Ten of those 42 states that cut their 2012 budgets to stay in the black are seeing an additional $3.2 billion shortfall in a fiscal year that still has four months to run. Those 10 are Alabama, California, Connecticut, Illinois, Kentucky, Louisiana, Maine, New Jersey, New York and Washington.
Aside from moving to progressive taxation, which most states have stubbornly avoided, what's a fix, even if just a Band-Aid?
One way to avert these kinds of cuts, as well as additional tax increases, would have been for the federal government to reduce state budget gaps by extending the Medicaid funds for as long as state fiscal conditions are expected to be problematic.What all this means is that what's happening in state and local governments is going to be a drag on the nation's economy for years to come. For those right-wingers gleefully rubbing their palms over seeing more budget whacks, it should be pointed out that these don't just chop off public-sector workers like teachers, firefighters and cops, they also hit vendors and contractors and a plethora of small businesses that depend on government purchases to keep them going. Lousy economics. And not very smart politics either.
But far from extending this aid, federal policymakers are moving ahead with plans to cut ongoing federal funding for states and localities, thereby making state fiscal conditions even worse. The federal government has already cut non-defense discretionary spending by nine percent in real terms since 2010. Discretionary spending caps established in the federal debt limit deal this past summer will result in an additional six percent cut by the end of the next decade. The additional cut by the end of the next decade would grow to 11 percent if sequestration — the automatic, across the board cuts also established in the debt limit deal — is allowed to take effect.