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State Budgets: The Fiscal Crisis and Beyond

State Budgets: The Fiscal Crisis and Beyond. Iris Lav, Deputy Director Center on Budget and Policy Priorities www.cbpp.org For Grantmakers in Health April 15, 2005. The State Fiscal Crisis Isn’t Over. Mid-year. $39-$41 billion. Initial. State Fiscal Years.

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State Budgets: The Fiscal Crisis and Beyond

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  1. State Budgets:The Fiscal Crisis and Beyond Iris Lav, Deputy Director Center on Budget and Policy Priorities www.cbpp.org For Grantmakers in Health April 15, 2005

  2. The State Fiscal Crisis Isn’t Over Mid-year $39-$41 billion Initial State Fiscal Years Note: In most states fiscal years run from July 1 to June 30. 2005 estimate based on CBPP survey.

  3. States Projecting FY 2005 Deficits

  4. Largely a Revenue Problem Ten straight quarters of negative or very low growth Adjusted for inflation and legislated tax changes. Source: Rockefeller Institute of Government.

  5. State Fiscal Crisis Being Solved inSignificant Part by Spending Cuts Annual Percent Change in Real Per Capita Spending Source: CBPP calculations of NASBO data on state general fund spending. FY05 data is proposed budgets, from CBPP survey.

  6. State Budget Crisis Hurts Low-Income, Working Families • 34 states cut health insurance eligibility; 1.2 to 1.6 million people are losing coverage, half of whom are children. • At least 32 states have cut eligibility for child care subsidies or otherwise limited access to child care • Per pupil state K-12 education spending, adjusted for inflation, dropped in 34 states between FY 2002 and FY 2004

  7. State Budget Crisis Hurts Low-Income, Working Families • Tuition is rising as states cut higher education funding. The cost of attendance at a 4-year public institution rose an average of $947 last year, a 9.8 percent increase. • 24 states cut aid to localities in 2003 and 2004; Aid declined 9.2 percent from 2003 to 2004

  8. Immediate Causes of State Deficits • Economic weakness, including capital gains decline and flagging employment, producing revenue weakness • State tax cuts: 43 states cut taxes between 1994 and 2001 – current cost is $40 billion a year; only half of which has been recouped from tax increases last two years • Federal actions and failures to act

  9. Tax Increase > 5% Tax Increase > 1% and < 5% Combination of Tax Increases and Tax Cuts No Significant Tax Increase Source: Center on Budget and Policy Priorities. Since 2001, 30 States Raised Taxes

  10. Center on Budget and Policy Priorities

  11. State Tax Increases So Far Are Too Small to Solve State Revenue Problems

  12. Federal Policies Expensive for StatesDuring State Fiscal Crisis, FY 2002 – 2005 $20 Billion Federal Policies Federal Tax Changes Remote Sales Internet Tax Freedom Act Unfunded Mandates Medicaid Dual Eligibles -$185 Billion

  13. Ongoing, Future Problems • Federal budget cuts that reduce grants to states and localities; block grants, additional unfunded mandates and tax preemptions • Structural deficits in state tax systems • “Starve the beast” strategies at state level

  14. Structural Deficits: Identified in early 1990s, Still Persist “The basic design of the tax systems with which states have entered the 1990s dates to the 1930s. They were designed for an economy of smokestack industries that no longer exists….The American population is older and more mobile than before….Business activities are increasingly multistate or international in scope….State governments have not succeeded in modernizing their tax systems to reflect these sweeping changes.” NCSL and NGA in Financing State Government in the 1990s, 1993.

  15. Structural Deficit Issues • Sales taxes that don’t tax services and e-commerce • Declining corporate income taxes • Income taxes with flat rates and/or too much exempt income • Loss of state estate taxes • Over-reliance on sin taxes and gambling

  16. “Starve the Beast” Tactics • Backloaded, slowly phasing in tax cuts without means to pay for them. For example: • MI: Phasing out Single Business Tax through 2009 without replacement revenue • NM: 5-yr. cut in income tax rate (8.2% to 4.9%); phase in of 50% capital gains tax cut • PA: Phasing out Capital Stock and Franchise Tax through 2011 • SC: Gov. proposes to cut income tax by 1/3 over 10 years

  17. “Starve the Beast” Tactics • Ratcheting down taxes in good times; not recouping in downturn • Budget process changes such as new, proposed constitutional amendments modeled on Colorado’s TABOR • ex: restricting growth in revenue (and thus expenditures) to inflation + population; requiring popular votes for tax increases • TABOR-like threats in MN, OH, OR, UT, WI and elsewhere – in IA pushing voter approval • High priority for Grover Norquist and Co.

  18. SFAI Trying to Form Planning Grants SFAI States and Wannabes DC

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