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  • Writer's pictureMarc Johnson

The State Fiscal Crisis

It’s Worse Than You Think

California’s new – old – governor, Jerry Brown, delivered his State of State address to the legislature last night. Lots of gloom and doom, not surprisingly, and calls for more drastic spending cuts and the extension of taxes.

California’s budget deficit is $25 billion – with a B. That amounts to 30 percent of the state’s budget and, if that problem and the certain prospect of additional cuts in education and social services weren’t bad enough, the painful reality for California and many other states is that a sizable portion of these huge deficits are literally baked into the fiscal cake of state governments for years to come.

The Brookings Institution’s Mountain West project, in cooperation with the Morrison Institute of Public Policy at Arizona State University, recently analyzed these so called “structural deficits” in four western states, California included.

Researchers concluded that the structural portions of the current state deficits are “the more or less permanent imbalances of revenues and expenditures that can arise from flaws in a state’s fiscal structure, fundamental changes in the regional economy or the state’s demographics, or, especially, imprudent or shortsighted policy choices.”

The study also looked at Arizona which “gave away the store in better times by handing out a series of ill-advised tax cuts (total value, adjusting for inflation and growth: $2.9 billion since 1993);” Nevada where a “narrow, consumption and real estate-oriented revenue system may well now be ill-attuned to a post-Recession “new normal” in which migration, homebuilding, and gaming are permanently depressed;” and Colorado were a “taxpayers bill of rights” has crippled revenue options and the funding for public education.

As for California, the study concluded that the state had “basically enacted too many permanent spending increases (notably on education) during the boom and more recent good times even as it left in place a series of rigid voter mandates and tax limitations.”

To put the situation even more bluntly, many states have for two decades been spending, tax forgiving and limiting their fiscal options; in essence behaving as mini versions of the federal government. So, while the economy will eventually recover and grow again, some of these state policy choices involving taxes and spending are truly “baked” into the system.

Idaho lawmakers had a rude awakening to this structural reality with the sudden discovery last week that a renewable energy tax credit coupled with routine conformance with the federal tax code is costing the state huge amounts of money. Many folks would rush, as the legislature did a while back, to embrace a tax credit to encourage renewables and the policy obviously worked. What is often missing when these policy choices are adopted is the long view. It is one thing to embrace an immediately attractive tax policy today, it is something else to consider that the diverted cash, now missing from the state budget, will come at the expense of an education or human services budget in the future.

The Brookings report offered four sensible policy suggestions. States should, and I quote from the report:

  1. Commit to a balanced approach. Massive budget gaps cannot be responsibly closed by only cutting spending. Budgetary balance and revenue diversification are crucial. In addition to balance and diversification, broad bases and tax system responsiveness should be mantras of fiscal system repair. Tax policies that increase the base and elasticity of state tax systems reduce the need for discretionary and unpopular rate increases.

  2. Maintain adequate rainy day funds. Most of the Mountain states exhausted their rainyday funds well before relieving their acute fiscal stress. As the economy gets back on its feet, state governments need to not just replenish, but increase their rainy day funds so that they can better weather protracted economic downturns in the future.

  3. Increase local flexibility and control. States have a history of passing measures that constrain local governments’ ability to raise revenues and respond to changing fiscal circumstances. Those local governments need greater control over revenue generation and public service.

  4. Improve budget processes and information sharing. Good policy decisions rest on good information and common-sense processes for delivering that information to the people who need it. Decision-makers need to have good data clearly presented about real and projected conditions, the range of policy options, and their consequences.

It must be noted, in contrast to those policy prescriptions, that Idaho lawmakers are still vowing to hold the line on any revenue diversification even as the state’s economy has changed dramatically in the last 30 years and more drastic cuts loom.

The state’s reserve funds are gone and the idea of more local control for local governments is about as popular as a skunk at a garden party. In fact, the Idaho Statesman’s Dan Popkey reported that some lawmakers have hungry eyes focused on that portion of the state sales tax that flows to local government. That’s not more local control, but less.

And, while Idaho has a long history of transparency in its budget process, missing until last week the multi-million dollar impact on state revenues of an established tax credit indicates there is a lot of room for improvement.

The Brookings report is a sobering assessment of the state budget troubles that loom ahead even as the economy starts to recover.

Tomorrow, why Utah is in considerably better shape than much of the rest of the west.

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