Following up on state fiscal challenges, our CBPP team has an important new figure showing that while state revenues are getting better, they're doing so a lot more slowly than in the past.
So I'm like... why? Are there structural changes -- ways in the which the underlying relationship between growth and state revenues have changed -- in play here?
To examine this possibility, I ran a very simple model of state revenues controlling for GDP growth. I ran the model through 2007q1, and predicted revenues through 2011q1. The blue line is real revenues and the red line controls for GDP growth (ignore the green line for now).
Up until the 2000s the fit is actually pretty good, as the predictions closely follow the actual revenue levels. But in this recession and the last one, the model breaks down.
Of course, you can see that in the first figure above. What's interesting here is that you get the same result even controlling for overall GDP growth. That is, you can't blame the weak revenue recovery on slow growth. Something else must be going on. For example, if states have followed the federal model and hollowed out their tax code (by lowering rates or narrowing the base), you'd get a picture like the one from the model.
Also, as my CBPP colleague Nick Johnson suggested, the fact that the last two downturns bit into household wealth -- like asset appreciation -- is important in this context (and GDP doesn't capture the full spate of wealth effects, e.g., it leaves out capital gains). Some states depend more on sales than income taxes, and since wealth losses whack consumption, that also hurts their coffers.
Adding net wealth to the model (green line) yields an interesting result: it explains little of the gap in the early 2000s recession but most of it in the recent downturn. My guess would be that has a lot to do with the scope and depth of the wealth losses. The stock market crash that precipitated the early 2000s downturn was particularly tough on high-end wealth relative to the housing bust of the Great Recession. In the latter case, you hit a lot more people in the middle class with a negative wealth effect that fed directly into state (and local) revenues.
Again, this means that federal countercyclical policy is not just important to help states through rough patches. It's increasingly important.
This post originally appeared at Jared Bernstein's On The Economy blog.
Hmm . . .
Maybe this is a sign that states should always plan for surpluses and stash away some cash for when the times are bad.
Then you say, "if states have followed the federal model and hollowed out their tax code (by lowering rates or narrowing the base)".
When did that happen? There has been no reduction is taxes since the Bush tax cuts 7 years ago. The federal government gave a couple of one time income tax bonuses tot he the people in the form of a tax credit, but that is not hollowing out their tax code. Taxes have remained essentially the same.
Please explain.
Your final paragraph does make sense. A lot of state revenue is obtained through property taxes and sales tax. My own home lost about have of its peak value and the property taxes have gone down by about a third. Not to worry though, my homeowners insurance went up by half again, so I am still paying more. As for sales taxes, if people are unemployed, they are spending it and not contributing to sales taxes.
It wasn't a failure. However, I do believe you have failed in any attempt to acquire actual knowledge over the Stimulus
Wake up.
2.5yrs, they still treat GOPers the same way, expecting a different result.
TBGOPers, said what their wishes and goals were, from day one.
No drama Obama, should stop creating and inviting drama from TBGOPers, elinimate the vacuum.
Pres Obama needs to envote the 14 amendment and be done with TBGOPers' complicity with wrecking the US economy.
You don't keep giving into Bully and hostage takers, they get emboldened.
When will this administration learn?
Pres Obama, as he says, the process is messy. Gues what, he is the president not in the senate any more, where delibrating, to delibrate is at infinity.
36yrs in the senate, VP Biden yet, he refused to use the powers he has as the president of the senate, by challenging their blocking of fine nominees as Goodwin Lui and the NPP guy, both were rejected.
Dick Cheney voted 7-9 times to get 51. Reid is not good for this president neither is pacifying the TBGOPers. When is The WH going to start really fighting for something, the Dem party, Workers and Middle class? Does anyone there know how the bully pulpit works?
Does pres Obama like being insulted? Now TBGOPers are trying to disrupt his tweeter townhall meeting.
Chicago Politics, the president promised, he understood. When will many of Us see that Chicago politics?
Mississippi gets $2.02 for every dollar it puts in and Alabama gets $1.53.
On the other hand, California, New York, Massachusetts and Illinois only get back $0.79 for every dollar they put in.
How about requiring that $0.95 of every tax dollar from a state must be spent in that state?
Conservatives in the Dakotas and Dixie will be begging for "socialism" in no time.
http://www.taxfoundation.org/taxdata/show/266.html
Maybe the taxpayers cannot afford to pay for smaller classroom sizes, special education, bi-lingual education, fast police, medical and fire response times, etc,
Maybe the taxpayers need to expect slower police and fire response times, no free emergency medical EMT response instead of paying for a taxicab ride to the hospital, more potholed in the streets, etc.
Making others pay for the higher level of my public services with Federal stimulus funds, and the excessive benefits that I pay my bureaucrats is not fair to those others that only pay as much as they can afford!
Many tax supported support bureaucratic services such as Armed Forces, Crime Prevention, Police, Utilities, Fire Protection and Education, will increase the productivity of the Agriculture, Mining, Technology, Construction and Industrial Productive activities of a family, tribe, island, or nation by allowing the producers to produce the food, shelter and clothing necessary to sustain life AND NOT HAVE TO WORRY about providing those services for themselves.
What you describe is a fairy tale. No such place exists, nor has existed. As many of us now point out, we are not broke. We are here because our policy has been for some time to deny revenues to government, and to transfer wealth to the few. Well, they now have it, and it isn't circulating to the remainder of us-unless, of course, we are Chinese.
I'm pretty sure why Woodrow Wilson and the progressives wanted it, but that didn't make it necessary in 1913, nor today.
If, and this is true in most areas, the amount of cash a property is worth determines the amount needed for police, education, fire, roads and fifty other services and when that home value is reset to real levels then every thing just mentioned also have to be cut or taxes increased to pay for the services.
So, it comes down to cutting the false value on your home to real value but doubling the tax rate to pay for the services you demand.