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A new report from the National Governors Association (NGA) and National Association of State Budget Officers (NASBO) explains that an uptick in revenues from modest economic growth is not enough to undo the damage from years of cuts to state governments during the recent economic downturn when revenues were underperforming.  According to NASBO, while state revenues are returning to pre-recession levels, spending is not, largely because lawmakers are being conservative – replenishing rainy day funds, for example – rather than restoring revenues to agencies that have been under-serving citizens for years.

Warnings of structural deficits at the state level predate the Great Recession. (See this PDF from the Center on Budget and Policy Priorities for an excellent overview.) They result from states failing to change their tax systems in a changing world – new kinds of economic activity, shifting demographics and a virtual epidemic of corporate and personal income tax cutting has left states congenitally unable to maintain the revenues they need when they need them.

And right now, with the cost of education and health care (the two biggest chunks of total state spending) growing faster than the economy and taking an ever growing bite out of budgets, states are facing a genuine crisis. In fact, the NGA/NASBO report notes that state spending on Medicaid continues to outpace all other spending and is projected to increase annually by 8.1 percent over the next 10 years.

As NGA Executive Director Dan Crippen explained to the Washington Post, this growth in expenditures without an injection of sufficient revenues means government leaders will have to choose which public services (schools, roads, police, etc.) get adequately funded, and which don’t. Again. And not only state programs: locally provided services that rely on state aid that have already seen devastating cuts in the past few years because of squeezed state budgets will continue to atrophy, too.

If state governments are to continue providing even just the same level of services to their citizens, they must modernize their revenue systems—and soon. As the Institute on Taxation and Economic Policy (ITEP) detailed in a 2011 report, state governments can and should make systemic changes such as expanding the state sales tax base to include services, eliminating tax loopholes (like those for capital gains) and ending corporate tax breaks that allow corporations to dodge taxes with accounting tricks.

States that continue to duck the issue and craft tax policy with short-term tweaks, political games and downright backward fixes will soon find that they are unable to fully fund basic services—even if an economic recovery improves revenues — and will be forced to cut more deeply into basic services, like keeping water clean and the courthouse staffed.

So the real news in this fiscal survey is actually an old story: without serious, substantial and responsible tax reform, revenues cannot keep pace with the needs of modern government.


Image from NGA report charts.