Now It's the States' Turn

As July gets closer, the economy should get another hit from decreased state budgets. According to the NYT:

State and city governments have yet to shrink the economy; indeed, they have even managed to prop it up. They have quietly maintained their spending at pre-crisis levels even as they warn of numerous cutbacks forced on them by declining tax revenues. The cutbacks, however, are written into budgets for a fiscal year that begins on July 1, a month away. In the meantime the states and cities, often drawing on rainy-day savings, have carried their share of the load for the national economy.

That share is gigantic. At $1.8 trillion annually in a $14 trillion economy, the states and municipalities spend almost twice as much as the federal government, including the cost of the Iraq war. When librarians, lifeguards, teachers, transit workers, road repair crews and health care workers disappear, or airport and school construction is halted, the economy trembles. None of that, or very little, has happened so far . . . despite a significant decline in tax revenue.

This correction has the potential to be disastrous. Obviously, most states have been preparing for the downturn, but according to the Center on Budget and Policy Priorities, up to 27 states are still facing budget deficits totally 47B. For example, California is facing a 16B budget deficit for the upcoming fiscal year. So dire is its situation, that Gov. Schwarzenegger has floated the idea of selling FUTURE lottery revenues for a discounted present lump sum. Meanwhile, Pennsylvania, reeling from the manufacturing revenue losses, recently sold the Pennsylvania Turnpike to an Australian investment company for 12.8B. What else can we sell? Will Texas sell the Alamo back to Mexico, who apparently wanted some time back?

However, the budgets in many of these states were estimated in the first quarter in the year, when a full blown recession was a blip on the scale, and oil was below 100 USD. I won't know exactly how well these estimates will perform in the current environment. For example, South Carolina has already had to make two downward revisions to its estimate, I'm pretty certain that's the current budget will not be drastic enough because we've got an additional problem (evidenced by the unexpected shortfall in the 2007 budget) that is exacerbated by stagflation. Several years ago, the state re-calibrated its tax scheme by reducing property taxes and eliminating the sales tax on unprepared food, while increasing it for discretionary spending and hospitality. The inflation side of the problem causes consumers to spend more on unprepared food and gasoline (tax based on gallons, not price); the stagnation side reduces the revenue produced by other discretionary spending on iPods, clothing, and eating out. So far, the SC tax base has been kept afloat because the weaker dollar and speculation has increased the value of our agricultural exports. Meanwhile, I'm keeping my fingers crossed that the expected tuition increase will be below 8%.