NCPA - National Center for Policy Analysis

States Want Federal Relief for State Budget Woes

March 18, 2003

Federal aid to the states is a waste of money, say some economists, because any federal spending increase ultimately falls on federal taxpayers -- the same taxpayers who pay the bills at the state level.

"Thus, increased federal aid to the states simply moves money from one pocket to another with no net economic effect," according to Chris Edwards, director of fiscal policy at the Cato Institute.

Edwards, the co-author of a recent study on state budget woes, found that state spending boomed as revenues grew during economic expansion of the 1990s:

  • Between 1990 and 2001, state tax revenues ballooned 86 percent, while spending kept pace, jumping from $274.7 billion in 1990 to $505.6 billion in 2001, an 84 percent increase.
  • Revenues are now in retreat, thanks to last year's recession and today's stagnant economy -- but spending continues to go up.
  • Cato found state spending grew 8 percent overall in 2001 and 4.8 percent in the first three quarters of 2002.

Most states are required by law to balance their budgets. With revenues sliding, states must look at cutting spending or hiking taxes.

  • Twenty-three states have already hiked taxes, mostly through fee increases and "sin" taxes on cigarettes and alcohol.
  • The total tax hike in 2002 was $8.3 billion, the biggest increase in a decade.

More tax increases are likely on the way.

  • The National Governors Association estimates that revenues will be off in fiscal 2003 by more than 6 percent, or $40 billion.
  • In fiscal 2004, things may get worse, with a shortfall of $82 billion expected by the NGA.

The red ink is especially dense in two of the nation's biggest states. California is facing a deficit of $35 billion. New York's shortfall could swell to $12 billion.

Source: Joseph Guinto, "States Want Federal Bailout, But Financial Help Unlikely," Investor's Business Daily, March 14, 2003; based on Chris Edwards, Stephen Moore and Phil Kerpen, "States Face Fiscal Crunch Following 1990s Spending Spree," Briefing Paper No. 80, February 2003, Cato Institute.

For Cato text


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