US state budgets hit by shrinking tax take
21 July 2009, by Nicole Bullock in New York (The Financial Times)
http://www.ft.com/cms/s/0/cf1d4964-758d-11de-9ed5-00144feabdc0.htmlSharply falling tax revenues across the US have left states facing fresh budget shortfalls and threatening further painful spending and service cuts following previous multiple rounds of belt-tightening.
In the first quarter of the calendar year, tax collections dropped by 11.7 per cent, the largest fall on record, according to the Rockefeller Institute of Government. Of 50 states, some 45 reported declines.
Early figures for April and May show an overall decline of nearly 20 per cent for total taxes, "a further dramatic worsening of fiscal conditions nationwide", says the institute.
Billions of dollars of federal stimulus funds, cuts to state employee jobs, school districts, healthcare and even the prison system, have so far failed to close the budget gaps.
"The states are constantly trying to recalibrate their budgets to deal with a shrinking revenue base," said Susan Urahn, managing director of state policy initiative at the Pew Center on the States.
It raises questions about how deep the decline in services may go, the direction of tax rates, and whether the federal stimulus measures are working.
"Clearly, states are enacting cuts in spending that are reducing aggregate demand and slowing down the recovery," said Nicholas Johnson, director of the state fiscal project at the Center on Budget and Policy Priorities, a research group that focuses on fiscal policy and public programmes that affect low- and moderate-income families and individuals.
"While they are not as great as they would be without the first round of stimulus, they do raise the question of whether additional federal aid is appropriate," Mr Johnson said.
Most US states must enact balanced budgets, and 46 of the 50 have fiscal years beginning on July 1. Already individual states from Maryland to Colorado are warning that deficits have reopened. California has resorted to issuing IOUs for payments such as welfare checks amid a stalemate over how to close its $26bn (£15.7bn) shortfall.
"Lawmakers just close gaps and more open ahead of them," said Corina Eckl, director of the fiscal affairs programme at the National Conference of State Legislatures, a bipartisan research group for the states. "We still have a long way ahead of us on these problems."
The US states had faced a projected cumulative budget gap of $143bn for fiscal 2010, according to data released yesterday by the NCSL. That figure is the largest since NCSL started compiling the data in fiscal 2002.
The problems do not end there: nearly two-thirds of states are projecting budget gaps for 2011, when far less stimulus will be available, and at least 15 states are already projecting gaps as far out as 2012, when federal aid is minimal, the NCSL study shows.
In reply to a question on the need for a second stimulus at a June 23 press conference, President Barack Obama said: "Well, not yet, because I think it's important to see how the economy evolves and how effective the first stimulus is."
The Obama administration's $787bn stimulus package dedicated about $165bn to the states, including $87bn for Medicaid, $48bn in a special fund for education and additional funds for education, childcare and community development.
A third prong consists of funding for infrastructure projects, meant to boost state economies by producing jobs, offsetting but not plugging budget gaps.
Analysts who specialise in state finances say the stimulus is filling up 30 to 40 per cent of the budget deficits, which is slightly less than had been anticipated because economic conditions turned out to be worse had been expected.
Texas and Nebraska filled nearly all their budget gaps with stimulus money while Kentucky, South Carolina, Vermont and New Mexico closed half of their budget gaps with federal money, the NCSL said.
"It appears that the state budget is once again being overwhelmed by the deteriorating economy," Warren Deschenaux, the main fiscal analyst for Maryland's General Assembly, wrote in a letter to state lawmakers earlier this month warning of a $700m shortfall.
Maryland's governor is working on a slew of new cuts.
To fill a previous $2bn gap, the budget already included $1bn of stimulus funds, 1,000 state job cuts and a 23 per cent reduction in spending for centres for the disabled. That is after $2.2bn in spending cuts the year before.
Mr Deschenaux projects a $1bn shortfall for next year.
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US state budgets hit by shrinking tax take
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