NCPA - National Center for Policy Analysis

Where Did the States Go Wrong?

February 1, 2011

There are several reasons for state governments' fiscal woes, says the Wall Street Journal.

The recession:

  • The deep and long recession devastated tax revenue --in early 2009, state and local tax revenue combined were down 11 percent from year-earlier levels.
  • Despite an improving U.S. economy, tax receipts at the state level remain 12 percent below prerecession peaks.

The boom:

  • In the good times, governments enjoyed and spent a tax windfall; state and local tax revenue rose 36 percent in the five years before the bust.
  • Going into the recession, spending exceeded the revenue that states and localities can expect to collect in normal times.

Health care:

  • In 1978, health spending accounted for 12 percent of state and local spending.
  • Twenty years later it was 20 percent of much-larger budgets.
  • Medicaid accounts for more than $1 in every $5 of state spending, more than states spend on elementary and secondary education.


  • States and localities began funding their pensions more soundly, but then a long bull market led management and unions to count on super-charged stock market returns to cover the future costs.
  • Stock market busts of the early and late 2000s show the downsides of that strategy.

Source: David Wessel, "What Sent States' Fiscal Picture into a Tailspin?" Wall Street Journal, January 27, 2011.

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