Figure 2
State and Local Government Debt Outstanding
2.5
2.23
2.19
2.00
2.0
1.85
1.68
1.57
1.44
1.5
1.30
1.20
1.14 4 1.18
.1
1.15
1.11
11.08 1.10
1.08
.08
1.05
0.99
1.03
1.0
0.5
Source: Federal Reserve Board, "Flow of Funds Accounts of the United States," June 5, 2008, Table D.3.
viduals and industries that will do little
crease actually enacted in the states was 5.6
to boost economic growth. Few gover-
percent, although that figure excludes data
nors seem to recognize the importance of
for fiscal 2009. Governors generally pro-
cutting marginal tax rates and pursuing
posed smaller spending increases than
· The governors, on average, oversaw a large
broad business tax reductions. Such sup-
those actually passed by state legislatures.
ply side tax cuts are needed to respond to
an increasingly competitive world econo-
increase in the cigarette tax rate, a small
my, but that message has not yet pene-
increase in the general sales tax rate, and
trated most state capitols.5
small cuts to individual and corporate
· In recent years, many states have over-
income tax rates (see Table A-2).
Fiscal Policy Outlook
hauled their school finance systems, which
have traditionally depended on local prop-
Rising budget gaps in many states this
erty taxes. Most overhauls have raised state-
year are forcing governors and legislatures to
level taxes, with the extra funds channeled
back to local governments to cut property
take corrective actions to balance their bud-
Few governors
taxes. This is an unfortunate trend, as it will
gets. The revenue gusher that state and local
seem to recognize
likely lead to growth in government by
governments have enjoyed since 2003 has
reducing beneficial tax competition be-
slowed as the U.S. economy has cooled. Many
the importance of
tween local jurisdictions. It also reduces
states are scaling back their spending plans,
cutting marginal
political accountability because it further
just as average families do during economic
tax rates and
divides responsibility for the cost and qual-
slowdowns.
ity of schooling between two levels of gov-
However, some government officials and
pursuing broad
· Most state tax cuts in recent years have
ernment.
news outlets are treating the current slow-
business tax
down in budget growth as if it were a major
crisis.6 Spending on schools is being "slashed,"
reductions.
been narrow breaks for particular indi-
6