State finances are looking better, but it's due more to luck than design.
State treasuries are taking in more money right now than they have in several years. All told, state revenues were up $35 billion in fiscal 2004 over 2003, and the trendline has continued rising since then. Even so, it's hard to find an expert who thinks there's anything much for policy makers to celebrate. "It's maybe not time to break out the champagne," says David Wyss, chief economist for Standard & Poor's. "Some cheap white wine would do."
If the news is good, why aren't budget watchers such as Wyss feeling fizzier? Maybe because governors and legislatures haven't really done a lot to solve the problem. Only about a fourth of last year's additional $35 billion came from changes in revenue policy, according to the Rockefeller Institute of Government. Most of the dollars were simply the gift of an improving economy, diminished unemployment or the "hidden tax" of inflation.
This is not going to be a brief for more tax hikes. But during the slowdown of the past several years, few states made any real change in their deeply entrenched and expensive revenue and spending habits. In most of them, tax reform efforts aimed at modernizing the revenue code to reflect the service-based economy have gone nowhere. Ongoing attempts at bureaucratic streamlining have yet to reap big dividends, either.
States have made significant spending cuts in a few areas, notably higher education and aid to localities. But they've done little about most of their major cost problems, such as K-12 schools, corrections and pensions. And they're far from getting the upper hand over Medicaid, the fast-growing kudzu covering more and more of their expense sheets. Every state has chipped away at the program, yet this past winter, when U.S. Health and Human Services Secretary Michael Leavitt challenged governors to find ways to lop off a few billion more, they insisted they couldn't come up with anything (although they are still working). Meanwhile, they successfully lobbied the U.S. Senate to block any federally imposed cuts at all.
The fact that most governors and legislatures survived the latest fiscal crisis using half-hearted measures--increasing user fees and shifting costs into future fiscal periods--means that states, despite the recent growth in revenues, are still vulnerable. Absent structural tax and spending changes, the next recession (whenever it comes) will see state lawmakers discovering that the fiscal situation looks depressingly like 2002 all over again.
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