Facing the Fiscal Crises in State Governments: National Problem; National Responsibilities

Two-and-half years after the 2001 recession ended, the states -- both individually and collectively -- face hard fiscal times. "Despite an improving economy," the National Conference of State Legislators recently reported, "states still must close . . . a $36 billion [collective budget] gap in fiscal year 2005." Indeed, the states must continue to deal with a large disparity between the expenditures required to provide the different services that different citizens seek and the revenues that their current tax structures produce. The states’ problem, however, is not that merely that they were hit very hard by the recession of 2001 or that they have been recovering from it very slowly. The problem is deeper. As the national economy continues to grow, the states continue to face a serious financial mismatch between revenues and expenditures. Indeed, given the realities of American federalism, state policymakers should prepare themselves to deal with tough fiscal times for the rest of the decade and (depending on what actions governments take) maybe longer. The financial trends are clear. The existing, built-in financial demands of the states’ current responsibilities are growing more rapidly than are revenues. Thus, until we citizens make a fundamental change in our political thinking --- either increasing the state taxes that we are willing to pay, or readjusting our expectations about the services we want state (and local) government to provide, or making some fundamental changes in intergovernmental responsibilities --- state policymakers should expect the tough fiscal times to continue for years to come.