Last year almost
iation of State Budget Officers, last year all but
Introduction
10 of the 50 states had end-of-year balances
half the states
that exceeded the 3 to 5 percent of expendi-
had gigantic
With the economy booming, tax revenues
tures recommended by most financial ana-
reserves of 10
lysts.4 Almost half the states had gigantic
are pouring into state treasuries, and most
state governments are in excellent fiscal
reserves of 10 percent or more.
percent or more.
shape.1 Last year, the 50 states closed their
Yet even with those large revenue reserves,
state spending has soared in recent years. By
books with a combined surplus of $36 billion.
virtually every measure, state budgets have
At 9 percent of expenditures, budget reserves
expanded faster in the 1990s than they did in
are at their highest level in nearly two decades.2
the fiscally reckless 1980s. Moreover, since
Predictably, those large surpluses have created
1994 state budgets have grown 50 percent
intense political pressure in state capitals for
faster than the federal budget. Rather than
new and expanded spending programs.
returning excess revenue to state taxpayers, all
Ten years ago, the states were in the midst
too often today governors and state legislators
of a similar fiscal boom. Few states resisted the
across America are spending the taxpayers'
pressure to use their surplus revenues to create
surplus.
costly new spending programs. Then when the
Some state officials have tried to justify
economy went into a downturn in 1990, the
the big budget hikes by arguing that vital
states found themselves in what many
public programs have been neglected by gov-
described as their worst fiscal crisis since the
ernors and state legislatures. The truth is that
Depression. Then-governor Mario Cuomo of
state governments have been on a long-term
New York described the situation in his state:
trend of rapid growth. State governments
"We are broke down to the marrow of our
consume a larger share of gross national
bones." That statement could have described
product today than ever before in history.
the fiscal plight of about half the states in the
Figure 1 shows that, since 1960, state revenue
early 1990s. Revenue growth slowed, but
as a percentage of GDP has roughly doubled.
demands to meet all the new spending com-
And it is untrue that states are doing more
mitments did not.3
because localities are doing less. Figure 2
States have been building up their "rainy
shows that combined state and local taxes as a
day" funds in recent years to protect against a
percentage of median family income have
recession. According to the National Assoc-
Figure 1
Figure 1
State Revenues as a Percentage of GDP
State Revenues as a Percentage of GDP
14%
12.8%
12%
11.0%
10%
10.5%
9.9%
9.6%
8%
8 .6 %
6 .8 %
6%
6 .2 %
4%
2%
0%
1960
1965
1970
1975
1980
1985
1990
1997
S o u r c e : U . S . D e p a r t m e n t o f C o m m e r c e , B u r e a u o f th e C e n s u s a n d B u r e a u o f E c o n o m i c
A n a l y s is .
Source: U.S. Department of Commerce, Bureau of the Census and Bureau of Economic Analysis.
2