Download - State Fiscal Challenges National Association of Business Economists Regional Roundtable Teleconference December 15, 2009 Donald J. Boyd Senior Fellow.

State Fiscal Challenges

National Association of Business Economists

Regional Roundtable Teleconference

December 15, 2009

Donald J. BoydSenior Fellow

2Rockefeller Institute of Government

State & local governments’ role as implementers of domestic policy has grown. Larger than feds, and now about 55% of

domestic spendingGovernment Direct Domestic General Expenditures as % of GDP

(Grants counted in government that finally spends them)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Sources: Federal Budget for Fiscal Year 2010 (Historical Table 3.1 outlays in total and by category; Table 12.1 grants)Census Bureau Government Finance data (direct general expenditures)

Federal domesticdirect expenditures

(excludes defense & grants)

State-local expenditures (including from federal grants)


Recessions and state-local finances• Most of the “action” – in terms of automatic impact of

recession on finances – is on the revenue side of the budget. (Pensions are an important exception. Medicaid also an exception – next slide.)

• Different revenue structures, different impacts:– Feds have the most volatile revenue structure (But who cares?

Annual balance not a goal)– States almost as volatile – and they must balance annual

budgets.– Local governments (and states that rely on property taxes)

generally less volatile. State aid often a great source of risk and volatility.

• Different recessions, different risks, different impacts on states – depends on interaction of economic turmoil with state revenue structures


Feds: Revenue oriented toward income taxesStates: Income and sales (with significant exceptions!)

Locals: Property tax and non-tax revenue - Great variation across states -

Federal State Local Federal State Local

General revenue $2,399.4 $1,385.4 $1,243.7 100.0 143.4 162.0

Own-source revenue 2,399.4 966.2 767.6 100.0 100.0 100.0Nontax 101.8 255.4 283.2 4.2 26.4 36.9Total Taxes 2,297.6 710.9 484.4 95.8 73.6 63.1

Individual income tax 1,846.1 245.9 22.7 76.9 25.4 3.0General sales tax 0.0 226.7 55.5 0.0 23.5 7.2Property tax 0.0 11.8 347.3 0.0 1.2 45.2Corporate income tax 350.0 47.5 5.5 14.6 4.9 0.7Other taxes 101.5 179.0 53.4 4.2 18.5 7.0

Revenue components as % of own-source totalRevenue in $ billions

Sources: Federal - U.S. Department of the Treasury Financial Statements for 2006, re-categorized by Rockefeller Institute; State and local - U.S. Bureau of the Census

Notes: Federal individual income tax includes FICA and other payroll taxes. Federal, state, and local taxes exclude unemployment insurance taxes.

Government revenue in fiscal year 2006


Medicaid and the business cycle• Sustained rise in unemployment leads to fewer workers

covered by employer-sponsored insurance, increase in Medicaid/SCHIP enrollment, and increase in costs of uncompensated care for uninsured adults

• Holahan & Garrett estimate unemployment rise from 4.6% (2007) to 10% would lead to 3.4m more children enrolled in Medicaid/SCHIP and 2.0m more adults; 2009 annual costs of $7.4b and $11.2b respectively, $18.6b total. State share of this is about $8b annually.

• In addition, they estimate 5.8m more uninsured adults, and increase in uncompensated care costs of $7.2b (federal/state/other split not clear).

• Total, all levels of gov’t, about $25.8b annual rate.

Holahan, John and Bowen Garrett, Rising Unemployment, Medicaid and the Uninsured, The Urban Institute, For Henry J. Kaiser Family Foundation, January 2009.


Real retail sales - a sales tax driver – were hit hardYear-on-year growth coming soon. Level will be far below

peakReal retail sales in selected recessions

Months since start of recession

Sources: Cleveland Federal Reserve Bank (pre-1990 retail sales), Census Bureau (1990+), and Bureau of Labor Statistics (CPI)

Cu

mu

lati

ve

% c

ha

ng

e s

inc

e s

tart

of

rec

es

sio

n

-10

-5

0

5

1973 rec.

1980 rec.

1990 rec.

2001 rec.

Nov 2009 (est.)

0 5 10 15 20 25 30 35

Recession

1973

1980

1990

2001

2007


Each of the last two quarters per Census (Jan-Mar and Apr-Jun)

was worst for state government taxes in 5+ decades

State government quarterly tax collections, inflation-adjusted% change vs. year ago

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

1963

Q1

1964

Q1

1965

Q1

1966

Q1

1967

Q1

1968

Q1

1969

Q1

1970

Q1

1971

Q1

1972

Q1

1973

Q1

1974

Q1

1975

Q1

1976

Q1

1977

Q1

1978

Q1

1979

Q1

1980

Q1

1981

Q1

1982

Q1

1983

Q1

1984

Q1

1985

Q1

1986

Q1

1987

Q1

1988

Q1

1989

Q1

1990

Q1

1991

Q1

1992

Q1

1993

Q1

1994

Q1

1995

Q1

1996

Q1

1997

Q1

1998

Q1

1999

Q1

2000

Q1

2001

Q1

2002

Q1

2003

Q1

2004

Q1

2005

Q1

2006

Q1

2007

Q1

2008

Q1

2009

Q1

Sources: Census Bureau (taxes); BEA (GDP price index)


Local taxes holding up better than state taxes,but have been weakening

State tax collections and local tax collections, inflation-adjusted% change vs. year ago

-20%

-15%

-10%

-5%

0%

5%

10%

15%

1989

q2

1990

q2

1991

q2

1992

q2

1993

q2

1994

q2

1995

q2

1996

q2

1997

q2

1998

q2

1999

q2

2000

q2

2001

q2

2002

q2

2003

q2

2004

q2

2005

q2

2006

q2

2007

q2

2008

q2

2009

q2

State

Local

Sources: Census Bureau (taxes); BEA (GDP price index)NOTE: 2-quarter average of % change, to make trends more discernible


Despite housing bust, for nation as a whole property tax continues to be far more stable than PIT and sales. (Some

state-specific exceptions)State and local quarterly tax collections, inflation-adjusted

% change vs. year ago

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

PIT

Sales tax

Property tax

Sources: Census Bureau (taxes); BEA (GDP price index)NOTE: 2-quarter average of % change, to make trends more discernible


Recent tax collections• Jan-Mar 2009 down 11.7% vs. year ago,

sharpest decline in 50+ years of recorded data• Apr-Jun even worse: Tax revenue down 17%• July-Sep preliminary RIG data: Down in all 49

states for which we had data– Personal income tax (PIT): -11.3%, down in all 40

states with data– Corporate income tax (CIT): -17.5%, down in 38 of 44

states with data– General sales tax (GST): -8.8%, down in 43 of 44

states• Oct: prelim data for 38 states, down 15.6%, down

in 34 of 38; PIT -14%, CIT -6.3%, GST -10.5%• Nov: federal taxes down 14% (partly legislation)


Preliminary Jul-Sep data: Total tax revenuedown 11%. Down in all 49 reporting states.

PIT CIT Sales Total PIT CIT Sales Total

United States (11.3) (17.5) (8.8) (11.1) Southeast (9.1) (5.2) (9.2) (8.1)

Alabama (26.7) (23.3) (13.0) (6.5)

New England (12.8) (21.8) (2.9) (10.0) Arkansas (6.9) (21.4) (11.1) (7.8)

Connecticut (13.9) (39.0) (9.2) (13.5) Florida (11.0) (8.1) (8.6)

Maine (11.8) 2.4 (10.1) (9.6) Georgia (14.6) (10.5) (14.7) (13.9)

Massachusetts (13.1) (24.6) 2.5 (10.0) Kentucky (7.1) (40.5) (7.5) (5.5)

New Hampshire (7.1) (1.6) Louisiana (0.7) 61.6 (16.7) (14.9)

Rhode Island (6.7) (43.4) (5.9) (6.7) Mississippi (12.2) (19.1) (12.4) (11.8)

Vermont (13.8) 3.3 (5.9) (8.4) North Carolina (5.9) (0.4) (3.7) (3.4)

South Carolina (6.2) 17.4 (6.8) (5.7)

Mid-Atlantic (8.0) (14.5) (7.5) (9.3) Tennessee 8.2 (9.5) (5.4)

Delaware (10.6) (61.8) (15.7) Virginia (6.9) (7.9) (5.5) (6.6)

Maryland (8.4) (30.9) (8.5) (10.5) West Virginia (6.7) (5.1) (4.6) (10.4)

New Jersey (8.9) (20.6) (5.9) (11.8)

New York (7.4) (3.7) (8.1) (8.9) Southwest (15.0) (43.3) (13.7) (17.0)

Pennsylvania (8.9) (15.0) (7.4) (7.5) Arizona (14.0) (38.4) (17.0) (16.3)

New Mexico

Great Lakes (12.8) (26.7) (9.8) (11.2) Oklahoma (16.3) (52.2) (15.0) (28.4)

Illinois (11.7) (28.4) (13.1) (12.6) Texas (13.1) (15.4)

Indiana (20.3) (42.4) (10.9) (14.2)

Michigan (12.0) (24.7) (7.1) (8.2) Rocky Mountain (11.7) (49.0) (16.1) (16.0)

Ohio (14.1) (111.3) (9.2) (12.1) Colorado (14.3) (24.6) (12.0) (14.1)

Wisconsin (8.1) 9.2 (8.7) (9.7) Idaho (4.8) (39.1) (12.9) (9.8)

Montana (14.4) (61.4) (20.2)

Plains (9.3) (27.5) (7.6) (9.7) Utah (8.3) (72.5) (23.0) (20.5)

Iowa (5.7) (67.3) (0.2) (5.0) Wyoming (25.2) (27.0)

Kansas (10.6) (28.7) (5.9) (12.5)

Minnesota (11.8) (22.2) (14.8) (12.3) Far West (15.3) (13.9) (5.1) (12.7)

Missouri (8.1) (8.5) (6.0) (6.9) Alaska (68.4) (52.4)

Nebraska (6.8) (35.4) (4.3) (7.6) California (16.0) (11.3) (1.0) (8.7)

North Dakota (3.7) (46.3) (10.0) (17.3) Hawaii (6.7) (27.3) (11.8) (9.4)

South Dakota (6.9) (8.8) Nevada (14.4) (8.9)

Oregon (12.0) (26.1) (12.1)

Washington (12.6) (5.8)

Source: Lucy Dadayan, Rockefeller Institute of Government

Preliminary tax collections for July-September 2009Percent change from year earlier


Capital gains – what will happen to 2009 gains?

• Gains fell 46% in 2001 and again in 2002 (23%)

• Fell significantly (50+%?) in 2008

• Stock market is up 17% since start of year, but YTD average value for 2009 is still about 29% below average for 2008

• Estimated payments fell 31% in April (median); also fell in June. Large decline in Sept seems likely (Fed non-withheld down 28%)

• Many forecasters expect 2nd decline in 2009

• Additional uncertainty about gains in 2010 due to federal tax law changes

Capital gains as % of gross domestic product

0

1

2

3

4

5

6

7

8

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

1986 tax reform

median for period

2007

Sources: (1) Capital gains: 1954-1998: Table capgain1-2001.pdf from IRS Statistics of Income web site (www.irs.gov/taxstats); 1999-2007 07in14ar.xls and similar SOI files; (2) Gross domestic product from U.S. Bureau of Economic Analysis

2008e

2000


Why doesn’t economic recoveryfeel like fiscal recovery?

• Sales taxes & withholding nearly contemporaneous with underlying economic activity so payment lags for these major sources are NOT the source of a fiscal lag

• Employment can lag GDP recovery; so can non-wage income (see next slide)

• Capital gains, after a crash, can recover sharply and still be far below their prior peak. And some (not all) tax payments on capital gains and other nonwage income can lag the income – e.g., in April-June 2011 taxpayers will settle up on gains earned in 2010

• Pension contributions will be increasing as the economy is recovering, creating fiscal pressure

• Medicaid costs rising

• Fiscal lag, in part, is perception and policy choice - spending rarely declines along with tax revenue, and states patch the gaps. Even after tax revenue starts growing from its trough, it can take years to reach its prior peak. So when tax revenue resumes growth it does not feel like fiscal recovery.


Wages and consumption of goods – important to state revenue – have recovered more slowly than GDP in most

recessions

Recession beginning in: GDP Wages Goods GDP Wages Goods

1948 1 2 0 (3.2) (4.1) (1.0) 1953 3 4 2 (3.2) (4.2) (2.0) 1957 3 4 4 (4.5) (5.3) (3.9) 1960 2 3 7 (2.0) (2.1) (3.8) 1969 1 4 1 (1.4) (2.1) (2.2) 1973 4 10 4 (4.3) (6.7) (4.4) 1980 3 5 8 (3.3) (3.6) (7.3) 1990 6 13 14 (2.0) (3.8) (5.5) 2001 1 17 1 (0.1) (3.9) (0.3) 2007 (4.9) (7.1) (10.1)

Real per-capita GDP, wages, and goods consumption in recent recessions

Source: Bureau of Economic Analysis. Real wages and goods consumption are nominal amounts deflated by personal consumption expenditure price index.

Note: Table treats April-June 2009 as trough quarter in current recession, but actual trough may occur later

# quarters after GDP recovery began before prior peak was

reattained % decline, peak quarter to

trough quarter


Taxes can take 3-5 or more years to re-attain

prior peak (absent tax increases)Taxes adjusted for population growth, inflation, and legislative changesBy fiscal year, indexed to approximate start of each fiscal crisis (Year 0)

85

90

95

100

105

110

-3 -2 -1 0 1 2 3 4 5

1981199020012008 Low-Gap Scenario2008 High-Gap Scenario

Sources: Tax revenue (Census Bureau and Rockefeller Institute estimates), Inflation (BEA GDP price index),Legislative changes (NGA/NASBO Fiscal Survey of States Fall 2008)


Hard to catch up with a crisis: Three consecutive years of shortfalls in last 2

recessions. Now?

Fiscal year Sales tax Income tax Corporate taxSum of major

taxes Sales tax Income tax Corporate taxSum of major

taxes1989 557 2,769 n/a 3,326 0.6% 3.2% n/a 1.9%

1990 (1,100) (1,027) (3,148) (5,275) -1.2% -1.1% -12.6% -2.5%1991 (4,502) (4,803) (3,269) (12,574) -4.6% -4.6% -13.4% -5.6%1992 (2,408) (4,847) (1,125) (8,380) -2.3% -4.4% -4.9% -3.5%

1990-1992 Sum (8,010) (10,677) (7,542) (26,229) -2.7% -3.4% -10.4% -3.9%

1994 1,492 (764) 1,178 1,906 1.4% -0.7% 4.8% 0.8%

Fiscal year Sales tax Income tax Corporate

tax Sum of major


taxes2000 4,756 7,020 615 12,391 2.7% 3.9% 1.9% 3.2%

2001 542 944 (1,759) (273) 0.4% 0.6% -7.2% -0.1%2002 (5,450) (27,504) (6,177) (39,131) -3.3% -12.8% -21.3% -9.5%2003 (5,866) (19,285) (1,135) (26,286) -3.4% -9.7% -4.1% -6.6%

2001-2003 Sum (10,774) (45,845) (9,071) (65,690) -2.3% -8.0% -11.2% -5.8%

2004 877 3,210 2,090 6,177 0.5% 1.7% 7.7% 1.6%

Fiscal year Sales tax Income tax Corporate

tax Sum of major


taxes2007 730 10,046 5,916 16,692 0.3% 4.0% 12.6% 3.3%

2008 (3,638) 5,714 (1,282) 794 -1.7% 2.1% -2.5% 0.1%2009 (12,304) (26,432) (9,096) (47,832) -5.6% -9.3% -17.4% -8.6%

NOTES: (1) FY 2009 based on spring responses, before shortfalls in income tax returns and sharp deterioration in sales tax, (2) Actual shortfalls for FY 2009 will be much larger than the numbers shown above (reported by NASBO in Spring 2009), (3) FY 2001 does not include California

Adopted-budget projections compared with actual results (or, for 2009, most-recent estimates)

1991 recession period



Source: NASBO/NGA Fiscal Survey of the States, fall of relevant year for prior recessions; spring 2009 for 2007 current recession

State tax revenue shortfalls in periods near recessions

Shortfall as % of tax sourceShortfall in $ millions


Timing of policy response to the 2001 crisis

What happened to total spending?

Fiscal yearReal per-capita

tax revenue growth

Revenue shortfall

(income, sales, and corporate

taxes)

Use of fund balance

Midyear budget cuts

Tax and revenue

enactments

Growth in real per-capita spending

financed from own sources

2001 0.1% -0.1% 0.8% 0.3% -1.0% 3.4%2002 -7.0% -9.5% 4.8% 2.6% 0.1% 2.0%2003 -0.6% -6.6% 0.3% 1.5% 1.5% 0.3%2004 3.6% 1.6% -1.9% 0.4% 1.6% -2.2%2005 5.3% 4.2% -2.9% 0.1% 0.5% 2.7%

Indicators of the magnitude of the crisis

Responses as % of tax revenue(Positive numbers reduce the budget gap)

Sources: Rockefeller Institute analsis of (1) data on fund balances, midyear budget cuts, and tax and revenue enactments from NASBO/NGA Fall Survey of the States, and (2) Tax and expenditure data from the Census Bureau.

Timing of state government response to the 2001 fiscal crisis


Historically, states face budget gaps and raise taxes well after recovery is underway

1980 -1.4% 1989 0.3% 2001 -1.0% 2009 0.2%

1981 0.3% 1990 1.7% 2002 0.1% 2010 3.4%

1982 2.4% 1991 3.4% 2003 1.5% 2011 ?

1983 2.1% 1992 4.7% 2004 1.7% 2012 ?

1984 5.4% 1993 0.9% 2005 0.5% 2013 ?

means economicrecovery underway

Enacted tax changes as % of tax revenue, four fiscal crises

Recession(s) of: Recession of: Recession of:Recession of:

Notes: (1) Fiscal year is year in which change took effect, not year of enactment; (2) positive numbers are tax increases, negative numbers are tax cuts; (3) In almost all states, fiscal year ends on June 30 of year shown above; (4) Recession dates are month of start to month of end; (5) Jan 1980 to Nov 1982 recession period is combined period of two consecutive recessions

Sources: NGA/NASBO Fall 2009 Fiscal Survey of the States (tax change estimates); Census Bureau (tax collections); Rockefeller Institute (estimated 2009 and 2010 collections); National Bureau of Economic Research (recession dates)

Jan 1980 to Nov 1982 Jul 1990 to Mar 1991 Dec 2007 to ????Mar 2001 to Nov 2001


The cliff: Baseline gaps of >$100b re-emerge under“high-gap” assumptions (absent recurring budget

actions)"High-Gap" Scenario:

State general revenue minus expenditures with and without federal stimulus

-8%

-6%

-4%

-2%

0%

2%

4%

2005 2006 2007 2008 2009 2010 2011 2012 2013

State fiscal year

Ba

lan

ce

(g

ap

) a

s %

of

ge

ne

ral

ex

pe

nd

itu

res

Without stimulus

With stimulus plan


Concluding comments & questions

• CBPP estimates $92+b of budget gaps for 2011, at least 37 states

• Shortfalls are still emerging in 2010 and 2011 projections may worsen

• Additional considerations• Loss of federal stimulus

• OPEB and pensions

• Medicaid – demographic & cost pressures

• Tax structures

• On the other hand, we are nearing the point at which revenue will start to grow y-o-y – albeit will be far below prior peak

Table Source: McNichol, Elizabeth and Johnson, Nicholas, Recession Continues to Batter State Budgets, Center on Budget and Policy Priorities, November 19, 2009

RockefellerInstitute

The Public Policy Institute of theState University of New York

411 State StreetAlbany, NY 12203-1003www.rockinst.org

Donald J. Boyd,Senior Fellow

[email protected]


Appendix


A majority of states have begun cutting state government employment (although reductions are far smaller than in private

sector)

Montana (12.4) Michigan (0.6) Arizona (7.5) Nevada (0.5) Connecticut (4.4) Wyoming (0.4) Kentucky (4.1) Alabama (0.4) Idaho (4.0) Utah (0.3) North Carolina (3.6) California (0.0) Ohio (3.6) Illinois 0.0 Indiana (3.5) Oregon 0.3 Massachusetts (3.4) Iowa 0.4 New Jersey (3.2) Maryland 0.5 Hawaii (3.2) Florida 0.6 Washington (2.9) Virginia 0.8 Delaware (2.9) Rhode Island 1.1 New York (2.9) Wisconsin 1.1 Louisiana (2.6) Missouri 1.1 Maine (2.5) Oklahoma 1.3 Tennessee (2.3) Pennsylvania 1.5 South Carolina (2.2) Mississippi 2.2 Georgia (1.7) Colorado 2.3 Kansas (1.7) Alaska 2.4 Vermont (1.3) South Dakota 2.4 New Hampshire (1.2) Arkansas 3.4 New Mexico (1.2) Nebraska 4.9 Minnesota (1.1) Texas 5.6 West Virginia (0.6) North Dakota 5.8

Source: BLS Current Employment Statistics

Percent change in state government employmentAugust-October 2009 vs. year earlier