States Are Facing an Uncertain Fiscal Future (Winter 2013 Trust Magazine)

03/08/2013 - When Congress approved a New Year's deal to prevent the nation from falling over the fiscal cliff, the question of how much taxes would increase was, at least for the time being, settled.

But important questions about federal spending cuts were left unanswered and the political leaders who need to know more about those possible reductions are not all in Washington. They are the governors and legislators in the 50 states who are facing tough budget decisions themselves this spring, the peak season for legislative sessions from Augusta, ME, to Honolulu.

Because the economic downturn has been so long and so deep—and because the recovery has been so tepid—these policymakers have struggled to balance their budgets in recent years. They already have exhausted short-term fixes such as tapping into rainy-day funds, using one-time asset sales, increasing taxes temporarily, postponing construction projects, or issuing more debt. They have seen state tax revenue decline by $97.9 billion, or 12 percent, in real terms from their 2008 peak to 2010. At the same time, demand for state services has increased substantially.

Since the Great Recession began, the states' reliance on federal grants and aid has increased significantly, according to a report by Pew's fiscal federalism initiative. In 2010, for example, the analysis showed that federal grants provided, on average, $1 out of every $3 in state revenue. That is why choices that federal policymakers are considering to cut the deficit could have a huge impact on state budgets.

In addition, state tax codes are often linked in various ways to the U.S. tax code, so changes to federal tax policies directly affect state revenues—decreasing tax receipts in some cases and increasing them in others.

"Right now, the impact on the states isn't really part of the national conversation in Washington," said Pew expert Anne Stauffer. "Finding opportunities for dialogue and comprehensive facts about the benefits and consequences of these fiscal decisions are vital to identifying solutions that will lead to long-term stability and effective services at all levels of government."

Just as this need to better understand the evolving relationship between federal and state governments increases, the ability to do so has declined. Federal units in the Office of Management and Budget, the Government Accountability Office, and the Office of Personnel Management that reviewed federal-state issues have been disbanded. Congressional subcommittees that once looked at the subject have new responsibilities, and even the Census Bureau has cut back its data-gathering on the subject.

Pew's fiscal federalism initiative, which was formed last year, conducts original, nonpartisan research and partners with other organizations to study the connections between federal and state governments' budget, tax, and fiscal policies. It shares the data with policymakers and also convenes meetings of federal and state decision makers to discuss the issues.

In November, the initiative issued a study on the potential impact of the fiscal cliff negotiations on states. "The public interest is best served by an enriched policy debate that incorporates implications for all levels of government and leads to long-term fiscal stability for the nation as a whole," said Stauffer, who directs the project.


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--Daniel LeDuc

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