States Keep Axes Sharpened

March 19, 2012

While the federal government has attempted to lead the way toward long-term economic recovery, state and local governments continue to struggle.  Facing large deficits and constrained from borrowing by their constitutions, each state's lawmakers have attempted to find effective solutions by way of new tax measures and spending cuts, says the Wall Street Journal.

  • State governments face a combined $47 billion gap between projected revenue and costs for the fiscal year that starts in July, according to the Center on Budget and Policy Priorities.
  • While that figure is high historically, it is less than half the budget shortfall that states confronted a year ago and down from $191 billion three years ago.
  • For the coming year 29 states have projected deficits; that is down from 42 a year ago and 46 the year before.

However, it is unlikely that the pace of this recovery on the local level will continue unabated.  States face the two-pronged threat of increased outlays for health care and the drying up of federal stimulus support.  Therefore, the unique methods states have employed to constrain deficits will likely have to be maintained or expanded upon in the near future.

  • The Florida legislature recently approved a $70 billion budget eliminating 4,355 jobs and reducing funding for hospitals and colleges to close an estimated $1.7 billion shortfall.
  • Pennsylvania lawmakers are preparing to take up a proposed budget that calls for cutting state funds for colleges by as much as 30 percent to close an estimated $746 million gap.
  • New York's governor has proposed cutting aid to local governments, eliminating cost-of-living increases for some state employees and extending a temporary tax on the wealthy to help close an estimated $3.5 billion gap.

Some argue that this is not the time to constrain spending, as the recovery is fragile and could face serious setbacks if states do not contribute to aggregate demand.  Further, these critics point out that states can take advantage of the historically low interest rates to fund major projects.

However, it bears mention that this fiscal crisis has also allowed states the opportunity to clean house by cutting government spending and optimizing efficiency.  By cutting 647,000 jobs since mid-2008, state and local governments have created sleeker administrations.

Source: Josh Mitchell, "States Keep Axes Sharpened," Wall Street Journal, March 12, 2012.

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