More on State Fiscal Travails

July 5th, 2011 at 6:44 pm

Following up on state fiscal challenges, our CBPP team has an important new figure showing that while state revenues are getting better, they’re doing so a lot more slowly than in the past.

So I’m like…why?  Are there structural changes—ways in the which the underlying relationship between growth and state revenues have changed—in play here?

To examine this possibility, I ran a very simply model of state revenues controlling for GDP growth.  I ran the model through 2007q1, and predicted revenues through 2011q1.  The blue line is real revenues and the red line controls for GDP growth (ignore the green line for now).

Up until the 2000s, the fit is actually pretty good, as the predictions closely follow the actual revenue levels.  But in this recession and the last one, the model breaks down.

Of course, you can see that in the first figure above.  What’s interesting here is that you get the same result even controlling for overall GDP growth.  That is, you can’t blame the weak revenue recovery on slow growth.  Something else must be going on.  For example, if states have followed the federal model and hollowed out their tax code (by lowering rates or narrowing the base), you’d get a picture like the one from the model.

Also, as my CBPP colleague Nick Johnson suggested, the fact that the last two downturns bit into household wealth–like asset appreciation–is important in this context (and GDP doesn’t capture the full spate of wealth effects, e.g., it leaves out capital gains).  Some states depend more on sales than income taxes, and since wealth losses whack consumption, that also hurts their coffers.

Adding net wealth to the model (green line) yields an interesting result: it explains little of the gap in the early 2000s recession but most of it in the recent downturn.  My guess would be that has a lot to do with the scope and depth of the wealth losses.  The stock market crash that precipitated the early 2000s downturn was particularly tough on high-end wealth relative to the housing bust of the Great Recession.  In the latter case, you hit a lot more people in the middle class with a negative wealth effect that fed directly into state (and local) revenues.

Again, this means that federal countercyclical policy is not just important to help states through rough patches.  It’s increasingly important.

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3 comments in reply to "More on State Fiscal Travails"

  1. Bob Callaway says:

    The word is travails. Copywriter please!

  2. Virgil Bierschwale says:

    There is something else going on, BUT YOU REFUSE TO EVEN LOOK AT IT.

    There is a chart in this ebooklet that I put together (5 min reading at most) that will show you that this happened in 2002/3 and massively i 2007 which surprise, surprise happens to mimic the chart you have above.

    the Ebooklet can be found on the following two links

    And if you want to see it step by step, you need to read these 4 short articles.

    You will need to read them in order to see the big picture.

    Start with this first one that I titled “Let’s put everybody in the European Union and the United States ouf of work by sending their job offshore and we will be Rich. Rich, I tell you…Rich”

    The next one is this one titled “Why is China becoming the largest Economy and what can we do to prevent the World’s economy from crashing?”

    The next one is this one titled “My calculations show 191 million 696 thousand 293 jobs have been sent offshore”

    The last one is this one titled “So you think it is impossible to have 191,696,293 jobs sent offshore from the European Union and the United States?”

    Now to fix the problem, we need to mandate that the SEC require all publicly traded companies to specify on their quarterly and annual reports the amount of employees (temp and perm) that they have working in each country, broken down by country with salary totals.

    Yep, this will not fix the problem, but it will give us a map that we need to steer the USS America so that we can make the right decisions.

    And before you go thinking I’m against global trade, forget that as I too realize that global trade is necessary.

    It just has to be done via these 3 very simple rules that benefit the people of each country, not the american and european union businesses.

    It is OK to grow, raise or manufacture your products here in America and sell them to other countries and the same applies to those countries.

    It is OK to open retail or manufacturing branches in other countries to offset the shipping problems as long as you hire the locals to work in those countries.

    It is NOT OK to put the people in your country out of work, send the growing, raising or manufacturing to another country and then import those products back into your country.

  3. bakho says:

    Don’ t know about other states, but Indiana under Daniels has reduced property taxes and increased sales taxes. During recessions, sales (and sales taxes) plummet. The property tax was more stable revenue.

    I think a number of states have done similar reductions to property tax. It is a way of shifting tax burden from the wealthy to the poor and middle class.