Tuesday, June 30, 2009

Fiscal Restraint from Those 50 Little Herbert Hoovers

I just checked with this source to see how state&local government purchases during 2009QI compared to where they were in 2008QIII and they declined by $78.8 billion in real terms over this 6 month period (while nominal spending fell from $1848.1 billion per year to $1784.0 billion per year, the GDP deflator rose by 0.83%). A post from Stephanie Kelton was my motivation.

But it isn't their fault. Tax revenues have fallen off a cliff, leaving states with a cumulative budget gap of more than $100 billion for fiscal '09. To deal with these shortfalls, states have laid off or furloughed thousands of employees, raised taxes and fees, and slashed spending on education and other social programs - some, many times over. It was supposed to balance their '09 budgets. But it wasn't nearly enough. As it turns out, state officials were far too optimistic about the '09 revenue picture, and they are scrambling to deal with widening shortfalls before the end of the fiscal year (which, by the way, is tomorrow for all but a few states). At this stage in the game, there are only a couple of ways for states to balance their '09 budgets (it's too late for more tax hikes and spending cuts). Most are expected to do one of two things: (1) tap rainy day funds or (2) use federal stimulus money.

Dr. Kelton argues for even a greater commitment to Federal revenue sharing or “state and local fiscal relief”. She has a point.


TheTrucker said...

It is far far too late but most of us land economics buffs say "we told ya so". If the primary tax revenue is from land values and the state varies the rate to raise or lower taxes then revenue shortfalls would never be this abrupt, California would not be a basket case, and the real estate bubble would never have gotten so far out of hand.

Even now, with real estate prices in the toilet the initial move toward land value taxation makes sense. California is a lost cause, but no crises should ever go to waste. The initial phase of LVT is a shift of taxes off of structures and on to land in a revenue neutral manner. The home owners/buyers pay the same amount of tax but all the tax is on the land and none on the structure. That increases the trade price of the structure and decreases the trade price of the land. Under those conditions empty lots are too expensive to hold off the market and construction gets a shot in the arm.

The current price of homes is still to high for the current wage levels. Wages must be induced to rise and inflation must be endured. The states probably need some belt tightening, but such tightening isn't helping in this recession. The suggested move will increase sales tax and income tax revenues because of the increased economic activity of building on land that was too expensive and now is not.
Land speculators should take it the shorts anyway.

Anonymous said...

I had trouble finding the numbers you report in your blog post.

I am looking in Table 3.3: State and Local Government Current Receipts and Expenditures.

Looking at this table, total state and local government expenditures have fallen by much much less than what you are reporting (less than $20 billion in nominal terms).

Did you get your data from a different table? How is different from total expenditures?

ProGrowthLiberal said...

Anon - look at the GDP figures which show state and local purchases (different from expenditures)