Dos and Don’ts of Coping with State Budget Crises: California is Not Alone

[courtesy of California Progress Report]

By Nathan Newman
Policy Director
Progressive States Network

The budget news is grim in some states. Twenty states face a combined budget shortfall of at least $35 billion for 2009, according to analysis by the Center on Budget Policy & Priorities (see CBPP graph below). Another 8 states will likely have budget problems next year or the year after.

The impulse by some state leaders is to slash state spending, but that could be disastrous for the economy if multiple states lay off state workers and cut-off help to those in need just as private spending is falling.

In fact, the right kind of revenue increases may be just what is needed for economic recovery. As Nobel Prize winning economist Joseph Stiglitz of Columbia University, and Peter Orzag, now the director of the Congressional Budget Office, have emphasized, budget cuts during a recession will usually hurt state economies far more than tax increases, since cuts come dollar-for-dollar out of the economy, while tax increases, especially if targeted at the wealthy, often "reduce saving rather than consumption, lessening its impact on the economy in the short run."

This Dispatch is designed to be a primer on what states can do to ease the burden on working families in distress, while asking wealthier taxpayers and corporations to shoulder their fair share during tough times.

Have Wealthy Pay Fair Share, Cut Taxes for Working Families

The sad truth is that almost every state tax system requires working families to pay a higher percentage of their income in taxes than their wealthier citizens. In fact, as the Institute on Taxation & Economic Policy detailed in their 2003 study, Who Pays?: "[O]nly four states require their best-off citizens to pay as much of their incomes in taxes as middle-income families have to pay." As the graph below from ITEP shows, the average family pays significantly more of their income in state taxes than the wealthy.