Arizona and California have been hit hard by the recession, but substantial budget deficits existed in both states even before the housing crisis sparked a national economic decline, according to a new report from a regional think tank .
The report, from the Brookings Institution Mountain West project and the Morrison Institute for Public Policy at Arizona State University, examines the fiscal conditions facing four western states: Arizona, California, Colorado and Nevada. It finds that often-hidden "structural" budget deficits — or a perennial gap between how much governments spend and how much they collect in taxes-
could make it much harder for these and other states to emerge from the recession, unless action is taken.
The report comes as most states are getting ready for their legislative sessions, with another tough budget year ahead.
"The budgetary condition of many states is, if anything, worse than is recognized," Mark Muro, a senior fellow and the policy director of the Metropolitan Policy Program at Brookings, said in a statement. "The gravity of states' short-term and especially longer-term deficits underscores that this is a time when state policymakers must break their bad habits and turn to more responsible budget planning practices that looks in a balanced way at the long-term fit of revenues to spending."
The study recommends that state lawmakers confront budget shortfalls through a balanced approach of spending cuts and revenue increases, rather than by spending cuts alone. It recommends diversifying the tax base and building substantial rainy-day funds, as well as giving local governments the option to raise their own revenues. It also urges states to improve the way their budget data is reported so lawmakers can make more informed decisions.
The report points to Utah as a state that has done a good job of budgeting before, during and after the recession. Although Utah wasn't hit nearly as hard by the housing bust as the other states examined in the report, it has used "quality budget information" and "sound budget processes" to avoid a sharper slide into recession, according to the study.
"Utah's avoidance of trouble confirms that a long-term vision and sound processes can promote budgetary balance over time," Matthew Murray, the report's lead author and an economics professor at the University of Tennessee, said.