State Answers to Federal Debt Questions

By Steve Arthur, Vice President

With an agreement finally having been reached over the debt limit, what are the next steps for Congress and the President? We can look to the states to see what may happen in DC over the next two to three years.

Some will argue that because 49 states have a balanced budget requirement, there is nothing to hold Congress accountable for deficit spending. I would disagree. The credit rating agencies’ threats to downgrade U.S. government debt may have a serious impact on elected officials and force them to finally get serious about the nation’s deficit spending. As the states have shown, it won’t be an easy process and will likely take more than one year, but the states’ experience is a guide to what we can expect at the federal level.

Like the federal government, the states have faced significant budget deficits as a result of the recession. The National Conference of State Legislatures (NCSL) reports that the states faced a combined $174 billion shortfall for FY 2010 (for most states beginning July 2009) on a combined General Fund budget total of approximately $600 billion, or 23%. This is a smaller, but comparable amount to the federal gap.

To get a general sense on how states resolved their budget deficits for the last three years, you can look at NCSL’s database that tracks each state’s budget cuts and revenue increases for the past three years. The data shows states have been making spending cuts each year for the past three years, but it also appears that major cuts were made in both 2010 and 2011, with fewer cuts being made this year as revenues have begun to improve.

However, the revenue data is very interesting. If you print out a chart of all revenue increases for each year, there are 12½ pages of increases for FY 2010. That number drops to six full pages for FY 2011, but drops down to just over 2 pages for 2012. Clearly, many states are moving away from revenue increases to deal with their budget deficits and doing so in a more serious manner. For example:

  • New York – With the budget 120 days overdue in 2010, this year’s budget was on time and included significant cuts.
  • California – After the budget was passed over 100 days late last year, the state also passed a budget on time with no new taxes. No taxes were included because the state’s Constitution requires a 2/3 vote for tax increases.
  • Washington – After raising taxes in 2010 to balance its budget, Washington State passed a no tax increase budget this year, in part because of a 2/3 vote requirement to raise taxes.

Even though most states appeared to lean more heavily on cuts to balance their budgets this year, there were significant exceptions:

  • Illinois – Approved a significant increase in the personal and corporate income tax rates to balance their budget this year.
  • Connecticut – Among other items, the state increased income and sales tax rates and added a “luxury” tax for certain items to balance its budget.

Of course, there were also some states that never had to face huge budget fights. Either because of their tax structure, economic profile or history of good fiscal stewardship, those states were able to pass budgets without making news. Unfortunately, those states are unlikely to provide much guidance for the federal government because of the serious fiscal condition of our federal government.

Even for those states with larger problems, they did take a variety of paths to balance their budgets, and for the most part budgets were passed on time. One widely reported exception was Minnesota, where a budget disagreement shut down the government for three weeks. The approved budget did not include any tax increases, but did include some significant accounting gimmicks used by other states that prevented more significant budget cuts. One of the most interesting items to come out of Minnesota was that It appeared most Minnesotans didn’t seem to be clamoring for the government to be re-opened until liquor licenses started to lapse. This weakened Governor Dayton’s hand in negotiations because he felt there would be a public outcry for services when the state shuttered its doors.

So what can we learn from the states’ experiences that might be relevant in DC?

First, there are going to continue to be significant fights over the level of funding. Just as the states have seen very divergent views on the size and scope of government, that fight is going to continue in Washington, DC. As the states have shown, there are no easy answers to bridge those differences.

Second, the Minnesota experience may be bad news for Democrats. This is not 1995 and a government shutdown may not cause the outcry that it did during the Clinton-Gingrich face-off. If the nation receives a federal shutdown like Minnesotans treated their state shutdown, Republicans may be in a very good position to extract additional concessions from Democrats during the appropriations process.

Third, state legislators are dealing with their budget problems directly. It did take most states a couple of years of gimmicks and one-time fixes before getting serious, but once the reality of long term reduced revenue projections sinks in, states are now making serious choices to address their budget imbalances. This is one reason even Democratic Governors have started taking on the state employee unions. Expect to see this at the federal level in the next couple of years.

Finally, the 2/3 vote requirement for tax increases did force budgets to be balanced with spending cuts. Both California and Washington State saw this happen with Democrats in control of both houses and the Governor’s mansion. In addition to pushing for a balanced budget amendment, there will be a significant push by Republicans for some sort of super majority requirement. Those state examples will also encourage Democrats to push back hard against those proposals.

While there are huge differences between the states and federal government such as a balanced budget requirement, the pressure to fix our budget problem is mounting and it will force more aggressive action than we have seen proposed to date. If Congress wants to know how the debate will play out, they should look to the states.

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4 Responses to “State Answers to Federal Debt Questions”

  1. jaye bea smalley (@jbsmalley) Says:

    while unfortunately we are moving away from revenue increases, there is still opportunity to maximize current programs, strategic funding opportunities and interagency collaboration. We can’t afford complacency or the silo approach.

  2. Jaye Bea Smalley Says:

    It is critical to leverage every opportunity to maximize current programs, strategic funding opportunities and interagency collaboration. We can’t afford complacency or the silo approach.

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