State Budget Crisis?

The Wall Street Journal reports today on the front page: “States Slammed by Tax Shortfalls.” According to the story, states are in “pain” because they are having to “slash” spending, which is causing some services to be “hit hard.”


The story illustrates the curious way that many newspapers report on state budget issues. The coverage is generally uncritical of state policymakers, treats any needed spending restraint as a crisis, and is devoid of hard facts about actual dollars spent by the states. It is as if the woe‐​is‐​me press releases of government groups such as the National Conference of State Legislatures are simply reprinted without any independent analysis by the reporters. Seven journalists contributed to the Journal story, but their job seems to have been to simply gather anecdotes in support of a new NCSL study on state budgets.


Oddly, the Journal undercut its own crisis tone in places, with reporting such as: “In Minnesota, the city of Duluth plans to stop operating its Fun Wagon—a free trailer stuffed with games and cookout supplies for a neighborhood party.” Geez, what a tragic loss for the city.


Anyway, the Journal is not alone in its pro‐​spending view of state budgets. A March 31 piece in the Washington Post (“States Hit Hard by Economic Downturn”) was of the same genre. It reported: “at least half of the nation’s states are facing budget shortfalls, some of them severe, and policymakers in most of the states affected are proposing and passing often‐​painful measures to trim costs and close the gaps. Spending on schools is being slashed…”.


The economics reporting of the Journal and Post is often outstanding. But the papers don’t apply a critical approach to state budget issues, as they do, for example, to federal budget issues. When the federal budget deficit increases, federal policymakers are often criticized for their bad decisionmaking. But when state budget “shortfalls” arise, state policymakers are almost always treated as innocent victims of uncontrollable events.


Are state governments in a fiscal crisis? Let’s look at a few hard facts, not reported in these two stories. Data from the U.S. Bureau of Economic Analysis show that total state and local tax revenues increased 8.4 percent in 2004, 8.9 percent in 2005, 6.6 percent in 2006, and 4.9 percent in 2007. Data for the first quarter of 2008 show that tax revenues are up 3.2 percent over the first quarter of 2007. Thus, government revenue growth has slowed from the large increases of recent years, but that is hardly a fiscal crisis. Indeed, it indicates a needed respite for overburdened state and local taxpayers.


Alternately, consider data on state government general fund spending from the National Association of State Budget Officers. Spending across the 50 states increased 6.5 percent in 2005, 8.7 percent in 2006, 9.3 percent in 2007, and 5.1 percent in 2008. Spending growth is projected to slow to 1 percent for 2009, but that is certainly no crisis after the orgy of budget expansion in recent years.


Nonetheless, there a real state fiscal crisis. But it is the longer‐​term problem of exploding spending on Medicaid combined with the huge growth in debt and unfunded retirement promises made to the nation’s 16 million state and local employees. Because of those problems, the real crisis in coming years might be headlined “States Slam Taxpayers with Huge Hikes.”