A Deficit State
Subject Budget deficits
Topic Fiscal Policy
Key Words Fiscal Policy, Budget Deficits, Recession, Tax Revenues
News Story

Budget issues are a state as well as a national economic issue. However, unlike the federal government that can, and sometimes should, run budget deficits, states are by law prohibited from doing so. The economic downturn that started in March 2000 has helped reek havoc on state finances. Faced with plunging tax collections and skyrocketing costs for medical care, states are facing huge deficits that must be eliminated by tax increases or cuts in services.

In response to its fiscal woes, states are raising tuition at public institutions, cutting Medicaid eligibility and raising corporate and individual income taxes. Health costs, including Medicaid, comprise 30 percent of a typical state budget, and last year these cost rose by 13 percent.

A study by the National Governors Association found that the amount of money at hand at the end of the last fiscal year was 2.9 percent of state spending, the smallest cushion since 1992. Tax revenues were down 6.3 percent according to the Rockefeller Institute of Government at the State university of New York. Massachusetts, Connecticut, New York, California, Alaska and Oregon were states that reported the largest decreases.

Raymond C. Scheppach, executive director of the governors association, said that state tax collections were far below the states' original estimates for the most recent fiscal year. Sales tax revenues were 3.2 percent lower than expected, corporate income taxes were 21.5 percent less, and personal income tax revenues were down 12.8 percent compared to what had been estimated.

While the economy is the primary reason for the states' economic predicament, all levels of government have been burdened by the need to install new security measures. Mayor Thomas M. Menino of Boston, president of the United States Conference of Mayors, estimated that the cost of these new measures for cities amounted to $2.6 billion. Federal officials recognize the problems that states face, but have been reluctant to provide any assistance. In July, the Senate did pass a measure to provide temporary grants for Medicaid and other social services, but the measure never became law. Federal deficits are growing and legislators say they have no money to spare.

(Updated December 16, 2002)


What are the primary sources of revenues for a state government? What are the primary expenditure categories?

2. What happens to revenues and expenditures as the state's economy contracts? Can the state run a budget deficit? What must it do when it faces a financial crisis?
3. What are some measures that states have turned to in order to balance its budgets?
4. 4. Federal officials are trying to stimulate the economy in order to keep the recovery on track. What is the likely consequence of state measures on the national recovery?
Source Robert Pear, "States Are Facing Big Fiscal Crises, Governors Report," The New York Times, November 26, 2002.

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