February 20, 2009 11:33AM

State Budget Exaggerations

Here we go again with the state budget "crisis" narrative. Today on the front page, the Washington Post highlights meaningless "budget gap" data from an interest group that always makes modest government restraint sound like fiscal armageddon.

[N]early all states are feeling pressure from falling revenue and rising costs as tax collections decline and demand for services increases. At least 46 states are facing shortfalls this year or next, and the combined budget gaps are estimated to total more than $350 billion, according to the Center on Budget and Policy Priorities.

There is a lot wrong with that statement. First, the $350 billion figure from CBPP is over three years, not the two implied by the story. Second, overall state/local tax revenues are essentially flat, not "falling" or "declining." Third, of course the "demand" for state services is increasing — you give people something for free and they want more and more. That's just Economics 101.

More importantly, budget gap data from the CBPP and the National Conference of State Legislatures are mainly fiction. The data have as much to do with errors in economic forecasting as with the economy. Suppose state general fund revenues and spending are $700 billion this year, and states had planned for these totals to rise to $750 billion next year. But now it looks like revenues will only be $710 billion next year — the “budget gap” is then said to be $40 billion and scaremongers would complain about $40 billion in "cuts." But you can see that the real problem is an error in forecasting combined with the assumption that spending should always rise. If spending is restrained, no actually gap appears.

Data from the National Governors Association show that state general fund spending has been flat, on average. Spending in FY2008 was exactly the same as it was in FY2009 at $689 billion. See pages 33 and 36 here.

More authoritative data for combined state and local governments comes from the Bureau of Economic Analysis (Table 3.3). Data for 2008 is now available. The figure shows that total spending has risen strongly and continuously in recent years, with a large rise of 6.1 percent in 2008.

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With the recession, state/local revenues are growing slowly, even as spending keeps rising. The table shows state/local tax receipts and overall state/local receipts, which includes federal grants and other items. (I have estimated corporate tax receipts for 2008).

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It appears that if the states and cities, on average, hold their spending growth to about 2 percent to match revenue growth, the budget gap problem is solved. When families and businesses across America are having to freeze or cut their budgets, it's surely no tragedy to expect such modest restraint from government.