Last night we mentioned NY Governor David Patterson, who just announced plans to withhold money from state schools in order to keep The Empire State solvent.
Paul Krugman would refer to him as a little Herbert Hoover for cutting spending during a recessionary, thus creating a drag on an economy that can ill-afford it.
Well, bad news, the little Hoovers are multiplying!
As Goldman Sachs (GS) notes (via ShiftCTRL), all around the coutry, state budgets are being negatively impacted by surprisingly sluggish tax receipts, and that’s going to contribute to lower spending, and that’s going to be a drag on the economy.
State budget gaps going into FY 2010 were
even larger than we thought. In April, the
National Conference of State Legislatures
(NCSL) estimated that these gaps totaled $121bn.
This was the latest figure available for our July
analysis, but it has since risen to $146bn.2 In
other words, state governments had to carve out
$25bn more in tax hikes or spending cuts than we
had expected as they finished work on FY 2010
budgets, a figure worth close to 0.2% of GDP.
2. Income and sales tax revenues have started the
fiscal year well below state budget officers’
expectations. In July, we said that these
expectations—up 1.3% for income taxes and 3%
for sales taxes—seemed unrealistically high given
the depth of the recession and the normal
tendency for tax revenues to lag economic turning
points. Data for the third quarter support this
scepticism. As shown in Exhibit 1, year-to-year
changes in both categories were deeply negative
according to the Rockefeller Institute of
Government, which tracks state revenue. Figures
in the national income and product accounts,
which add in local government revenues, were
governments would exert a drag of 0.6-0.7 percentage
points on annualized real GDP growth between mid-
2009 and mid-2010, a period that corresponds to fiscal
year (FY) 2010 for most of these jurisdictions.1 This
projection was predicated on: (1) an observation that
federal fiscal stimulus under the American Recovery
and Reinvestment Act (ARRA) would offset only part
of the shortfalls state governments faced in attempting
to balance their budgets, and (2) a judgment that tax
revenues would continue to fall short of expectations
as the fiscal year unfolded, reflecting the depth of the
recession. Together, these two factors implied the
likelihood of $80-$100bn in fiscal restraint to bring
and keep these budgets in balance.
This estimate is about on track judging from the
also down sharply. This was the basis for our full
fiscal year estimates, and for both categories it is
clear that the year is off to a very weak start. The
evidence on corporate taxes—not shown—is
more mixed but also less important as these levies
comprise only about 4% of state tax revenue.
3. As a result, most budget officers have lowered
their sights on general revenues for FY 2010.
According to the NCSL, 39 states plus Puerto
Rico now expect general revenues to fall in FY
2010, and at least 9 expect setbacks of more than
5%. Of the 10 states indicating that general
revenue might beat their projections, several—
including California—have cited tax law changes
(rather than economic conditions) as the principal
reason. Judging from the data presented in
Exhibit 1, the reduced expectations for the group
as a whole still embody an implicit assumption
that year-to-year tax flows will improve over the
next three quarters. This is not unreasonable for
an economy that is slowly coming back to life, but
the risks still lie to the downside. For example,
the Rockefeller Institute reports that tax flows in
the fourth quarter remain depressed according to
4. Spending has also surprised to the high side.
Although revenue shortfalls have been the main
factor causing budget gaps to reemerge during the
fiscal year, state governments have had to spend
more on Medicaid and other public support
programs, the need for which rises as the
economy weakens. Almost two-fifths of the
states reported this as a problem.
5. Together, surprises on both sides of the ledger
have opened up a new mid-year budget gap of
at least $28bn. We say “at least” because 15
states have not yet revised estimates; the $28bn
figure comes from the other 36 that have done so
(counting Puerto Rico among those that now see
new shortfalls). Of the missing 15, only a few are
apt to avoid midcourse corrections, and some of
the 36 will probably find that their gaps are even
wider than they now anticipate.