State tax receipts were down sharply during the most recent quarter, representing what is likely to be their biggest decline in more than six years, according to a new report that highlights a widening fiscal crisis in state government.The Center for Budget and Policy Priorities surveyed data from revenue departments for 15 states that had available figures, and found the median state experienced an inflation-adjusted 5.5% decline in total tax revenue during the quarter that ended in September. Total revenue was down in 14 of the 15 states, after adjusting for inflation.
The organization, a liberal think tank based in Washington, estimates states will face a total budget gap of $100 billion by fiscal 2010, which starts in the middle of next year, or about 15% of their budgets.
The decline in state tax receipts has potentially broad economic significance. The federal government is expected to keep spending relatively steady to prop up the failing economy. But states generally have rules requiring balanced budgets, and so must either cut spending or raise taxes -- both the opposite of what many economists, including some deficit hawks, say is needed during the current economic downturn.
In addition, states often take measures that exacerbate the difficulties created by the recession, such as tightening Medicaid eligibility at a time when workers lose their jobs and health insurance.
Cuts in state spending "will take demand out of the overall economy and worsen the economic downturn," said Nicholas Johnson, co-author of the Center's new paper and director of the group's State Fiscal Project. "Furloughing teachers, or cutting reimbursements to Medicaid providers, or cutting grants to nonprofit social-service providers or raising tuition at public colleges, these are all things that take dollars out of families' pockets, and that's money they can't spend in their local economies."
The new report found that states reported a median, inflation-adjusted decline of 7.3% in sales-tax revenue, driven by the drop in consumer spending. Personal income-tax revenue, which had kept growing until recently, was down 2% in the median state, after being adjusted for inflation, the report found. The drop in personal income taxes was driven by mounting job losses, which last month increased at the fastest pace in five years, according to the Labor Department.
The state reporting the biggest decline in tax revenue was Washington, which had an inflation-adjusted drop of 11.3%.
More broadly, the report found that 39 states have publicly announced budget problems for the current fiscal year or are projecting them for next year.
In California, for example, officials are looking to plug an estimated $3 billion shortfall this year -- out of a total budget of $103 billion, said H.D. Palmer, a spokesman for the state's Department of Finance. In Pennsylvania, Gov. Ed Rendell last month ordered a statewide 4.25% cut in most departmental budgets.
Chris Edwards, director of tax-policy studies at the libertarian Cato Institute, said the recession should prompt states to tighten their belts and overhaul programs. "Private companies do it all the time, and I think it's beneficial," he said. "Recessions come and go -- we survive."
