Dire States: Fiscal Effects and Policy Choices During the Great Recession
The Great Recession and its aftermath have put enormous fiscal pressures on the American states, which must bear the triple burden of steeply declining tax revenues, exploding costs for social assistance programs, and large investment losses in state pension funds. The aggregate budgetary shortfall experienced by the states amounted to some $430 billion between 2009 and 2011.
While the fiscal effects of the Great Recession have been widespread, the magnitude of these budgetary problems has varied substantially across the states, and these disparities appear to be growing. In FY 2009, 43 states reported budget gaps ranging from under three percent (for Connecticut and Maryland) to over 14 percent (for Arizona and California). For FY 2012, projected shortfalls as a percentage of prior-year budgets are projected to range from four percent (in Idaho) to 45 percent (in Nevada).
Political scientist Andrea Campbell of MIT proposes to examine this variation in fiscal experience across the states during and after the Great Recession in order to appraise the extent to which budgetary shortfalls are related to differences in the fiscal and political institutions of the states. In addition to looking at the sheer size of the budgetary shortfall, Campbell also plans to analyze variation in the states’ policy responses to budgetary problems and the consequences of those policy responses for specially-vulnerable populations.
In her efforts to understand the possible causes of state-by-state variation in the magnitude of fiscal problems and the nature of their policy responses, Campbell will investigate three kinds of factors: fiscal institutions, like balanced budget rules and tax and expenditure limits; political institutions, like direct democracy and term limits; and political factors, like divided government, partisan control, and inequality in political participation. For each factor, the question of interest is whether it exacerbated or mitigated the fiscal effects of the Great Recession. So, to take just a few examples of the many issues Campbell plans to examine: Did states with tax and expenditure limits experience smaller budgetary shortfalls because pre-recession spending grew more slowly in those states? Did states with term limits for legislators and state executives have larger deficits and make different policy choices in response to budgetary problems than states without term limits? Did states controlled by Democratic legislatures respond differently than states controlled by Republicans? Did states with divided government have particular difficulty deciding how to resolve budgetary problems? And, did states with more unequal political participation tend to favor the interests of the politically active in their policy responses to the Great Recession?
Campbell’s outcome measures will include changes in budgetary shortfalls, in the level and mix of taxes, and in spending and program funding across the states. In addition, she will examine outcomes for vulnerable populations including changes in program enrollments and poverty levels. Data on these outcomes and on the institutional and political factors she plans to examine are available from a number of sources including the Pew Center on the States, the National Conference of State Legislatures, the National Association of State Budget Officers, the Tax Policy Center of the Urban Institute and Brookings Institution, the Center on Budget and Policy Priorities, and the Census Bureau’s Survey of State and Local Government Finances.