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Recession Continues to Batter State Budgets; State Responses Could Slow Recovery
By Elizabeth McNichol and Nicholas Johnson
Updated October 20, 2009
The worst recession since the 1930s has caused the steepest decline in state tax receipts on record. As a result, even after making very deep cuts, states continue to face large budget gaps. New shortfalls have opened up in the budgets of over half the states for the current fiscal year (FY 2010, which began July 1 in most states). In addition, initial indications are that states will face shortfalls as big as or bigger than they faced this year in the upcoming 2011 fiscal year. States will continue to struggle to find the revenue needed to support critical public services for a number of years.
By Elizabeth McNichol and Nicholas Johnson
Updated October 20, 2009
The worst recession since the 1930s has caused the steepest decline in state tax receipts on record. As a result, even after making very deep cuts, states continue to face large budget gaps. New shortfalls have opened up in the budgets of over half the states for the current fiscal year (FY 2010, which began July 1 in most states). In addition, initial indications are that states will face shortfalls as big as or bigger than they faced this year in the upcoming 2011 fiscal year. States will continue to struggle to find the revenue needed to support critical public services for a number of years.
- New gaps in 2010 budgets. An increasing number of states are struggling to keep their 2010 budgets in balance as the mid-point of the fiscal year approaches. Because revenues have fallen short of projections, mid-year shortfalls have opened up in 26 states — some of which have already addressed them — totaling $16 billion or 4 percent of these budgets.
These new shortfalls are in addition to the gaps states closed when adopting their fiscal year 2010 budgets earlier this year. Counting both initial and mid-year shortfalls, 48 states have addressed or still face such shortfalls in their budgets for fiscal year 2010, totaling $178 billion or 26 percent of state budgets — the largest gaps on record. - Additional large gaps for 2011. States’ fiscal problems will continue into the next fiscal year and likely beyond. Fiscal year 2011 gaps – both those still open and those already addressed — total $80 billion or 14 percent of budgets for the 35 states that have estimated the size of these gaps. These totals are likely to grow as revenues continue to deteriorate, and may well exceed $180 billion.
- Combined Gaps of $350 billion for 2010 and 2011. These numbers suggest that when all is said and done, states will have dealt with a total budget shortfall of at least $350 billion for 2010 and 2011. (This includes both gaps already closed and gaps projected for the future.)
- Role of Federal Assistance. The federal assistance to states provided in the American Recovery and Reinvestment Act is lessening the extent to which states need to reduce services or raise taxes. But it now appears likely the federal assistance will end before state budget gaps have abated. The federal government could avert state actions such as deep additional budget cuts that would further harm the economy by phasing out assistance more gradually over the period during which state fiscal distress is expected to continue.
