The Center on Budget and Policy Priorities, which focuses on state and federal budget policies, issued a new report Thursday (4/18/12) analyzing how states resolved their budget shortfalls: “Cuts in Services Have Been States’ Primary Response to Budget Gaps, Harming the Nation’s Economy.” The report documents $290 billion in budget cuts, $100 billion in tax and fee increases, $160 billion in emergency federal aid, and $60 billion of drawn-down state reserves, in past five years. Unfortunately for the economy, both emergency federal aid and usable state reserves have dwindled, so the impact on state budgets is worst in 2012. The situation, in other words, is not improving.
The lack of balance between revenues and spending was most pronounced in fiscal year 2012, as reserves dwindled, federal aid largely expired and states enacted even fewer tax and fee increases. In 2012, spending cuts totaled nearly $140 billion, almost as much as the combined total for the previous four years. Tax and fee increases were just $20 billion, and federal aid and the use of reserves accounted for close to $15 billion.
Revenues are slowly (very slowly) improving, but CBPP estimates that at the current rate, revenues won’t reach pre-recession levels for seven years. And meanwhile, populations are increasing, incomes continue to stagnate, and the likelihood that any eventual post-recessionary positive revenue will result in restoration of cut programs, versus tax cuts, remains small (remember the 1990s?). Cuts to education and safety net programs are immensely difficult to reverse.
Although CBPP’s report doesn’t address the impact on cities, many of the cuts to state programs deeply impact city programs, particularly K-12 education funding. The report also doesn’t mention the power of many states to retain revenue raised at the local level, revenues that now fund state spending rather than local programs. In the most deeply recessionary states, such as California and Michigan, this has had devastating effects on local governments.