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Any National Stimulus Might Be Offset by State Finances

Daily Policy Digest

Tax Issues

Friday, November 30, 2001

It might be compared to a salmon struggling to swim upstream: any stimulus package Congress might pass will be forced to battle budget cuts and tax hikes put into motion by cash-strapped cities and states.

States may be looking at a shortfall this year of up to $50 billion.

That could neutralize as much as one-third of any tax cuts and new spending in a Washington stimulus package, experts warn.

Some 44 states are facing lower-than-expected revenues, 19 are spending over their budgets and 28 are considering budget cuts.

Making matters worse, proposals in Washington to speed up corporate tax write-offs for capital investment could drain up to $5 billion from state coffers - just as states are hit with unexpected public safety costs to deal with terrorism.

The program causing some of the biggest headaches for states is Medicaid -- which accounts for roughly 20 percent of state budgets. Cost were expected to increase by nearly 11 percent for states even before the economic slump.

And the Urban Institute figures even a one-percentage-point rise in jobless rolls will throw 1.5 million more people into the program.

Source: Howard Gleckman, "Why States Will Be a Drag on Recovery," Business Week, November 26, 2001.

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