The State of State Budgets National Conference of State Legislatures Fiscal Leaders Seminar San Diego, CA December 9, 2009 Donald J. Boyd Senior Fellow
State & local governments role as implementers of domestic policy has grown. Larger than feds, and now about 55% of domestic spending 20% 18% Government Direct Domestic General Expenditures as % of GDP (Grants counted in government that finally spends them) State-local expenditures (including from federal grants) 16% 14% 12% 10% Federal domestic direct expenditures (excludes defense & grants) 8% 6% 4% 2% 0% 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Sources: Federal Budget for Fiscal Year 2010 (Historical Table 3.1 outlays in total and by category; Table 12.1 grants) Census Bureau Government Finance data (direct general expenditures) 2
Recessions and state-local finances Most of the action in terms of automatic impact of recession on finances is on the revenue side of the budget. (Pensions are an important exception. Medicaid also an exception next slide.) Different revenue structures, different impacts: Feds have the most volatile revenue structure t (But who cares? Annual balance not a goal) States almost as volatile and they must balance annual budgets. Local governments (and states that rely on property taxes) generally less volatile. State aid often a great source of risk and volatility. Different recessions, different risks, different impacts on states depends on interaction of economic turmoil with state revenue structures 3
Feds: Revenue oriented toward income taxes States: Income and sales (with significant exceptions!) Locals: Property tax and non-tax revenueenue - Great variation across states - Government revenue in fiscal year 2006 Revenue in $ billions Revenue components as % of own-source total Federal State Local Federal State Local General revenue $2,399.4 $1,385.4 $1,243.7 100.0 143.4 162.0 Own-source revenue 2,399.4 966.2 767.6 100.0 100.0 100.0 Nontax 101.8 255.4 283.2 4.2 26.4 36.9 Total Taxes 22976 2,297.6 710.9 484.44 95.8 73.6 63.1 Individual income tax 1,846.1 245.9 22.7 76.9 25.4 3.0 General sales tax 0.0 226.7 55.5 0.0 23.5 7.2 Property tax 0.0 11.8 347.3 0.0 1.2 45.2 Corporate income tax 350.0 47.5 5.5 14.6 4.9 0.7 Other taxes 101.5 179.0 53.4 4.2 18.5 7.0 Sources: Federal - U.S. Department of the Treasury Financial Statements for 2006, re-categorized by Rockefeller Institute; State and local - U.S. Bureau of the Census Notes: Federal individual income tax includes FICA and other payroll taxes. Federal, state, and local taxes exclude unemployment insurance taxes. 4
Medicaid and the business cycle Sustained rise in unemployment leads to fewer workers covered by employer-sponsored insurance, increase in Medicaid/SCHIP enrollment, and increase in costs of uncompensated care for uninsured adults Holahan & Garrett estimate unemployment rise from 4.6% (2007) to 10% would lead to 3.4m more children enrolled in Medicaid/SCHIP and 2.0m more adults; 2009 annual costs of $7.4b and $11.2b respectively, $18.6b total. t State t share of this is about $8b annually. In addition, they estimate 5.8m more uninsured adults, and increase in uncompensated care costs of $7.2b (federal/state/other split not clear). Total, all levels of gov t, about $25.8b annual rate. Holahan, John and Bowen Garrett, Rising Unemployment, Medicaid and the Uninsured, The Urban Institute, For Henry J. Kaiser Family Foundation, January 2009. 5
Real retail sales - a sales tax driver were hit hard A recent glimmer Been down so long it looks like up Real retail sales in selected recessions 2001 rec. 5 Cumulative % change since start of re ecession 0-5 1990 rec. 1973 rec. Recession 1973 1980 1990 2001 2007 1980 rec. -10 Oct 2009 0 5 10 15 20 25 30 35 Months since start of recession Sources: Cleveland Federal Reserve Bank (pre-1990 retail sales), Census Bureau (1990+), and Bureau of Labor Statistics (CPI) 6
Each of the last two quarters (Jan-Mar and Apr-Jun) was the worst for state government taxes in 5+ decades 20% State government quarterly tax collections, inflation adjusted % change vs. year ago 15% 10% 5% 0% 1963 Q1 1964 Q1 1965 Q1 1966 Q1 1967 Q1 1968 Q1 1969 Q1 1970 Q1 1971 Q1 1972 Q1 1973 Q1 1974 Q1 1975 Q1 1976 Q1 1977 Q1 1978 Q1 1979 Q1 1980 Q1 1981 Q1 1982 Q1 1983 Q1 1984 Q1 1985 Q1 1986 Q1 1987 Q1 1988 Q1 1989 Q1 1990 Q1 1991 Q1 1992 Q1 1993 Q1 1994 Q1 1995 Q1 1996 Q1 1997 Q1 1998 Q1 1999 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 5% 10% 15% 20% Sources: Census Bureau (taxes); BEA (GDP price index) 7
Local taxes holding up better than state taxes, but have been weakening 15% State tax collections and local tax collections, inflation-adjusted % change vs. year ago 10% 5% 0% 1989q2-5% 1990q2 1991q2 1992q2 1993q2 1994q2 1995q2 1996q2 1997q2 1998q2 1999q2 2000q2 2001q2 2002q2 2003q2 2004q2 2005q2 2006q2 2007q2 2008q2 2009q2 State Local -10% -15% -20% Sources: Census Bureau (taxes); BEA (GDP price index) NOTE: 2 quarter average of % change, to make trends more discernible 8
Despite housing bust, for nation as a whole property tax continues to be far more stable than PIT and sales. (Some state-specific exceptions) 20% State and local quarterly tax collections, inflation-adjusted % change vs. year ago 15% 10% 5% 0% 1989q2-5% 1990q2 1991q2 1992q2 1993q2 1994q2 1995q2 1996q2 1997q2 1998q2 1999q2 2000q2 2001q2 2002q2 2003q2 2004q2 2005q2 2006q2 2007q2 2008q2 2009q2-10% PIT Sales tax -15% Property tax -20% -25% Sources: Census Bureau (taxes); BEA (GDP price index) NOTE: 2 quarter average of % change, to make trends more discernible 9
Recent state tax collections Jan-Mar 2009 down 11.7% vs. year ago, sharpest decline in 50+ years of recorded data Apr-Jun even worse: Tax revenue down 17% (Census) July-Sep preliminary RIG data: Down in all 49 states t for which h we had data Personal income tax (PIT): -11.3%, down in all 40 states with data Corporate income tax (CIT): -17.5%, down in 38 of 44 states with datasales tax -10.6%, down in 41 of 42 states General sales tax (GST): -8.8%, down in 43 of 44 states Oct: prelim data for 38 states, down 15.6%, down in 34 of 38; PIT -14%, CIT -6.3%, GST -10.5% 10
Preliminary Jul-Sep data: Total tax revenue down 11%. Down in all 49 reporting states. Preliminary tax collections for July-September 2009 Percent change from year earlier PIT CIT Sales Total PIT CIT Sales Total United States (11.3) (17.5) (8.8) (11.1) Southeast (9.1) (5.2) (9.2) (8.1) Alabama (26.7) (23.3) (13.0) (6.5) New England (12.8) (21.8) (2.9) (10.0) 0) Arkansas (6.9) (21.4) (11.1) 1) (7.8) Connecticut (13.9) (39.0) (9.2) (13.5) Florida (11.0) (8.1) (8.6) Maine (11.8) 2.4 (10.1) (9.6) Georgia (14.6) (10.5) (14.7) (13.9) Massachusetts (13.1) (24.6) 2.5 (10.0) Kentucky (7.1) (40.5) (7.5) (5.5) New Hampshire (7.1) (1.6) Louisiana (0.7) 61.6 (16.7) (14.9) Rhode Island (6.7) (43.4) (5.9) (6.7) Mississippi (12.2) (19.1) (12.4) (11.8) Vermont (13.8) 3.3 (5.9) (8.4) North Carolina (5.9) (0.4) (3.7) (3.4) South Carolina (6.2) 17.4 (6.8) (5.7) Mid-Atlantic (8.0) (14.5) (7.5) (9.3) Tennessee 8.2 (9.5) (5.4) Delaware (10.6) (61.8) (15.7) Virginia (6.9) (7.9) (5.5) (6.6) Maryland (8.4) (30.9) (8.5) (10.5) West Virginia (6.7) (5.1) (4.6) (10.4) New Jersey (8.9) (20.6) (5.9) (11.8) New York (7.4) (3.7) (8.1) (8.9) Southwest (15.0) (43.3) (13.7) (17.0) Pennsylvania (8.9) (15.0) (7.4) (7.5) Arizona (14.0) (38.4) (17.0) (16.3) New Mexico Great Lakes (12.8) (26.7) (9.8) (11.2) Oklahoma (16.3) (52.2) 2) (15.0) (28.4) Illinois (11.7) (28.4) (13.1) (12.6) Texas (13.1) (15.4) Indiana (20.3) (42.4) (10.9) (14.2) Michigan (12.0) (24.7) (7.1) (8.2) Rocky Mountain (11.7) (49.0) (16.1) (16.0) Ohio (14.1) (111.3) (9.2) (12.1) Colorado (14.3) (24.6) (12.0) (14.1) Wisconsin (8.1) 9.2 (8.7) (9.7) Idaho (4.8) (39.1) (12.9) (9.8) Montana (14.4) (61.4) (20.2) Plains (9.3) (27.5) (7.6) (9.7) Utah (8.3) (72.5) (23.0) (20.5) Iowa (5.7) (67.3) (0.2) (5.0) Wyoming (25.2) (27.0) Kansas (10.6) (28.7) (5.9) (12.5) Minnesota (11.8) (22.2) (14.8) (12.3) Far West (15.3) (13.9) (5.1) (12.7) Missouri (8.1) (8.5) (6.0) (6.9) Alaska (68.4) (52.4) Nebraska (6.8) (35.4) (4.3) (7.6) California (16.0) (11.3) (1.0) (8.7) North Dakota (3.7) (46.3) (10.0) (17.3) Hawaii (6.7) (27.3) (11.8) (9.4) South Dakota (6.9) (8.8) Nevada (14.4) (8.9) Oregon (12.0) (26.1) (12.1) 1) Washington (12.6) (5.8) Source: Lucy Dadayan, 11
Capital gains what will happen to 2009 gains? Gains fell 46% in 2001 and again in 2002 (23%) Fell significantly (50+%?) in 2008 8 Capital gains as % of gross domestic product 1986 tax reform Stock market is up 17% since start of year, but YTD average value for 2009 is still about 29% below average for 2008 7 6 2000 2007 Estimated payments fell 31% in April (median); also fell in June. Large decline in Sept seems likely (Fed non-withheld down 28%) 5 4 Many forecasters expect 2 nd decline in 2009 3 median for period 2008e Additional uncertainty about gains in 2010 due to federal tax law changes 2 1 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Sources: (1) Capital gains: 1954-1998: Table capgain1-2001.pdf from IRS Statistics of Income web site (www.irs.gov/taxstats); 1999-2007 07in14ar.xls and similar SOI files; (2) Gross domestic product from U.S. Bureau of Economic Analysis 12
Why doesn t economic recovery feel like fiscal recovery? Sales taxes & withholding nearly contemporaneous with underlying economic activity so payment lags for these major sources are NOT the source of a fiscal lag Employment can lag GDP recovery; so can non-wage income Capital gains, after a crash, can recover sharply and still be far below their prior peak. And some (not all) tax payments on capital gains and other nonwage income can lag the income e.g., in April-June 2011 taxpayers will settle up on gains earned in 2010 Pension contributions can be increasing as the economy is recovering, creating fiscal pressure Fiscal lag, in part, is perception and policy choice - spending rarely declines along with tax revenue, and states patch the gaps. Even after tax revenue starts growing from its trough, it can take years to reach its prior peak. So when tax revenue en e resumes growth it does not feel like fiscal recovery. 13
Wages and consumption of goods important to state revenue have recovered more slowly than GDP in most recessions Real per-capita GDP, wages, and goods consumption in recent recessions # quarters after GDP recovery began before prior peak was % decline,,peak quarter to reattained trough quarter Recession beginning in: GDP Wages Goods GDP Wages Goods 1948 1 2 0 (3.2) (4.1) (1.0) 1953 3 4 2 (3.2) (4.2) (2.0) 1957 3 4 4 (4.5) (5.3) (3.9) 1960 2 3 7 (2.0) (2.1) (3.8) 1969 1 4 1 (1.4) (2.1) (2.2) 1973 4 10 4 (4.3) (6.7) (4.4) 1980 3 5 8 (3.3) (3.6) (7.3) 1990 6 13 14 (2.0) (3.8) (5.5) 2001 1 17 1 (0.1) (3.9) (0.3) 2007 (4.9) (7.1) (10.1) Source: Bureau of Economic Analysis. Real wages and goods consumption are nominal amounts deflated by personal consumption expenditure price index. Note: Table treats April-June 2009 as trough quarter in current recession, but actual trough may occur later 14
Taxes can take 3-5 or more years to re-attain prior peak (absent tax increases) 110 105 Taxes adjusted for population growth, inflation, and legislative changes By fiscal year, indexed to approximate start of each fiscal crisis (Year 0) 1981 1990 2001 2008 Low-Gap Scenario 2008 High-Gap Scenario 100-3 -2-1 0 1 2 3 4 5 95 90 85 Sources: Tax revenue (Census Bureau and Rockefeller Institute estimates), Inflation (BEA GDP price index), Legislative changes (NGA/NASBO Fiscal Survey of States Fall 2008) 15
Hard to catch up with a crisis: Three consecutive years of shortfalls in last 2 recessions. Now? State tax revenue shortfalls in periods near recessions Adopted-budget projections compared with actual results (or, for 2009, most-recent estimates) Shortfall in $ millions Shortfall as % of tax source 1991 recession period Fiscal year Sales tax Income tax Corporate tax Sum of major taxes Sales tax Income tax Corporate tax Sum of major taxes 1989 557 2,769 n/a 3,326 0.6% 3.2% n/a 1.9% 1990 (1,100) (1,027) (3,148) (5,275) -1.2% -1.1% -12.6% -2.5% 1991 (4,502) (4,803) (3,269) (12,574) -4.6% -4.6% -13.4% -5.6% 1992 (2,408) (4,847) (1,125) (8,380) -2.3% -4.4% -4.9% -3.5% 1990-1992 Sum (8,010) (10,677) (7,542) (26,229) 229) -2.7% 27% -3.4% 34% -10.4% -3.9% 39% 1994 1,492 (764) 1,178 1,906 1.4% -0.7% 4.8% 0.8% 2001 recession period Fiscal year Sales tax Income tax Corporate tax Sum of major taxes Sales tax Income tax Corporate tax Sum of major taxes 2000 4,756 7,020 615 12,391 2.7% 3.9% 1.9% 3.2% 2001 542 944 (1,759) (273) 0.4% 0.6% -7.2% -0.1% 2002 (5,450) (27,504) (6,177) (39,131) -3.3% -12.8% -21.3% -9.5% 2003 (5,866) (19,285) (1,135) (26,286) -3.4% -9.7% -4.1% -6.6% 2001-2003 Sum (10,774) (45,845) (9,071) (65,690) -2.3% -8.0% -11.2% -5.8% 2004 877 3,210 2,090 6,177 0.5% 1.7% 7.7% 1.6% 2007 recession period Fiscal year Sales tax Income tax Corporate tax Sum of major taxes Sales tax Income tax Corporate tax Sum of major taxes 2007 730 10,046 5,916 16,692 0.3% 4.0% 12.6% 3.3% 2008 (3,638) 5,714 (1,282) 794-1.7% 2.1% -2.5% 0.1% 2009 (12,304) (26,432) (9,096) (47,832) -5.6% -9.3% -17.4% -8.6% NOTES: (1) FY 2009 based on spring responses, before shortfalls in income tax returns and sharp deterioration in sales tax, (2) Actual shortfalls for FY 2009 will be much larger than the numbers shown above (reported by NASBO in Spring 2009), (3) FY 2001 does not include California Source: NASBO/NGA Fiscal Survey of the States, fall of relevant year for prior recessions; spring 2009 for 2007 current recession 16
Timing of policy response to the 2001 crisis Fiscal year Real per-capita tax revenue growth Timing of state government response to the 2001 fiscal crisis Indicators of the magnitude of the crisis Responses as % of tax revenue (Positive numbers reduce the budget gap) Revenue shortfall Tax and Use of fund Midyear (income, sales, revenue balance budget cuts and corporate enactments taxes) What happened to total spending? Growth in real per- capita spending financed from own sources 2001 0.1% -0.1% 0.8% 0.3% -1.0% 3.4% 2002-7.0% 70% -9.5% 95% 48% 4.8% 26% 2.6% 01% 0.1% 20% 2.0% 2003-0.6% -6.6% 0.3% 1.5% 1.5% 0.3% 2004 3.6% 1.6% -1.9% 0.4% 1.6% -2.2% 2005 5.3% 4.2% -2.9% 0.1% 0.5% 2.7% Sources: Rockefeller Institute analsis of (1) () data on fund balances, midyear budget cuts, and tax and revenue enactments from NASBO/NGA Fall Survey of the States, and (2) Tax and expenditure data from the Census Bureau. 17
Historically, states face budget gaps and raise taxes well after recovery is underway Enacted tax changes as % of tax revenue, four fiscal crises Recession(s) of: Recession of: Recession of: Recession of: Jan 1980 to Nov 1982 Jul 1990 to Mar 1991 Mar 2001 to Nov 2001 Dec 2007 to???? 1980-1.4% 1989 0.3% 2001-1.0% 2009 0.2% 1981 0.3% 1990 1.7% 2002 0.1% 2010 3.4% 1982 24% 2.4% 1991 34% 3.4% 2003 15% 1.5% 2011? 1983 2.1% 1992 4.7% 2004 1.7% 2012? 1984 5.4% 1993 0.9% 2005 0.5% 2013? means economic recovery underway Notes: (1) Fiscal year is year in which change took effect, not year of enactment; (2) positive numbers are tax increases, negative numbers are tax cuts; (3) In almost all states, fiscal year ends on June 30 of year shown above; (4) Recession dates are month of start to month of end; (5) Jan 1980 to Nov 1982 recession period is combined period of two consecutive recessions Sources: NGA/NASBO Fall 2009 Fiscal Survey of the States (tax change estimates); Census Bureau (tax collections); Rockefeller Institute (estimated 2009 and 2010 collections); National Bureau of Economic Research (recession dates) 18
The cliff: Baseline gaps of >$100b re-emerge under high-gap assumptions (absent recurring budget actions) 4% "High-Gap" Scenario: State general revenue minus expenditures with and without federal stimulus 2% as % of general expe enditures Balance (gap) 0% -2% -4% Without stimulus With stimulus plan 2005 2006 2007 2008 2009 2010 2011 2012 2013-6% -8% State fiscal year 19
Concluding comments & questions CBPP estimates $92+b of budget gaps for 2011, at least 37 states (how does that compare with legislative estimates?) Shortfalls are still emerging in 2010 Additional considerations Loss of federal stimulus OPEB and pensions Medicaid demographic & cost pressures Tax structures How does 2012 look? Prospects for multi-year approaches? Table Source: McNichol, Elizabeth and Johnson, Nicholas, Recession Continues to Batter State Budgets, Center on Budget and Policy Priorities, November 19, 2009 20
Rockefeller Institute The Public Policy Institute of the State University of New York 411 State Street Albany, NY 12203-1003 1003 www.rockinst.org Donald J. Boyd, Senior Fellow boydd@rockinst.org
Appendix 22
A majority of states have begun cutting state government employment (although reductions are far smaller than in private sector) Percent change in state government employment August October 2009 vs. year earlier Montana (12.4) Michigan (0.6) Arizona (7.5) Nevada (0.5) Connecticut (4.4) Wyoming (0.4) Kentucky (4.1) Alabama (0.4) Idaho (4.0) Utah (0.3) North Carolina (3.6) California (0.0) Ohio (3.6) Illinois 0.0 Indiana (3.5) Oregon 0.3 Massachusetts (3.4) Iowa 0.4 New Jersey (3.2) Maryland 0.5 Hawaii (3.2) Florida 0.6 Washington (2.9) Virginia 0.8 Delaware (2.9) Rhode Island 1.1 New York (2.9) Wisconsini 11 1.1 Louisiana (2.6) Missouri 1.1 Maine (2.5) Oklahoma 1.3 Tennessee (2.3) Pennsylvania 1.5 South Carolina (2.2) Mississippi 2.2 Georgia (1.7) Colorado 2.3 Kansas (1.7) Alaska 2.4 Vermont (1.3) South Dakota 2.4 New Hampshire (1.2) Arkansas 3.4 New Mexico (1.2) Nebraska 4.9 Minnesota (1.1) Texas 5.6 West Virginia (0.6) North Dakota 58 5.8 Source: BLS Current Employment Statistics 23