First, let me explain a little about State budgets. All state government budgets are unique in this way; government budgets are based on the past. That is, they are based on past tax collections on transactions that took place even farther in the past- especially income tax collections. This isn't like a real estate tax where one can predict every day what kind of revenues are going to come in. This is why you see state and federal government revenue collections struggle 1-2 years after economies start to struggle. The first budget that was passed in good times typically can be adjusted to make ends meet. But the second budget where the full force of the economic downturn has finally had its impact and revenue collection, states have a difficult time closing gaps. As time goes on and short-term budget gap solutions have been exhausted, each successive budget gets more and more difficult to balance.
Pennsylvania passed its budget the other night. There is a good, quick summary of the roundabout way we got the the budget we did over at the Post-Gazette. There are many who say we did not cut spending enough. The problem is that the impetus to cut spending just wasn't there. The budget wasn't bad enough for lawmakers to have make those kind of very difficult decisions. However, in other states, lawmakers are struggling with budgets that are under water mere months after passing.
Let's take a look at California. Once the worlds seventh largest economy on its own, California has struggled the past two years to figure out a way to cut programs and raise revenues. Even with $32 billion in budget cuts and efforts to raise almost $17 billion in new revenue, California is still in the red. From this article at Bloomberg you can see that things in California are still dire.
Next, let's take a look at New York. You may remember back in April/May that New York planned on implementing a 30% increase in taxes on the wealthy. They saw it as an easy way to close their budget gap. The income tax increased 3.45 percentage points to 10.4% on people earning greater than $250,000- one of the highest rates in the nation. Other states across the country waited to see what the outcome of this taxation would be. Well, here in this article from Miami (Florida was apparently one of the states watching) New York Governor David Patterson admits that the higher tax rates have "yielded lower than expected state wealth". Twenty-percent lower to be more exact.
Ok, so those are two of the larger states in the Country. Surely the smaller states are in better financial condition. Well, not exactly.
Indiana- Continuing Plunge in Revenue Alarms Governor Daniels- State revenue for the last three months is almost 10% less than projected just a few months ago.
Kentucky- State Revenues Plunge in First Quarter- General Fund revenue has dropped 10% from last year.
Iowa- Tax Collections forecast to drop 7.1%; steep budget cuts expected- "Today's news is that plunging tax revenues have knocked the state budget severely out of balance just three months into the budget year."
Texas- State sales tax collections down for 8th month in a row- In Texas they expect this will continue through the end of the year.
Georgia- State Tax Collections Drop Sharply- Georgia's collections are down over 16% year over year.
A lot of states made some tough decisions last year in cutting workers and making serious budget cuts. Look for round two of these cuts to start heating up early in the new year.
There are a couple of lessons to be learned here. First, committing future budget dollars to perpetual programs based on the tax collections obtained in good economic times only leads to the pain that many of these states are feeling today. If the states had budgeted within their means and had sufficient reserves then some programs would not have been started in the first place. Unfortunately, most governments budget to the last dollar leaving insufficient dollars for the lean times. Pennsylvania has a "rainy day" fund and they have tapped that fund the last two years to help make ends meet- this is why we didn't have as severe cuts as other states. The second lesson to be learned (thanks to New York) is that increasing taxes on the wealthy will only make the wealthy leave. There were some high profile defections from New York from Rush Limbaugh to Tom Golisano (owner of the Buffalo Sabres) to Nancy Bell (a manufacturer who moved her facility to Florida). All three of these people moved their residences to Florida to avoid the higher taxes. The fact is, you need the wealthy. You need them to stay and invest and employ people.
There is a lot of uncertainty out there at the moment. People are talking about a "V" shaped recession where we get out of the thing as fast as we got into it. Others suggest "W"s or "U"s or even "L"s. No matter what letter you choose, unemployment is expected to rise past 10% and continue rising into next year. If George W. Bush had the "jobless economic expansion" then this is turning into the "jobless economic recovery". Income tax and sales tax revenues to governments will not recover until employment recovers. This means we have at least two more years of state and federal budget cuts coming.
Thanks for reading.
