The list goes on and on about how many US states are in extremely dire straights economically. Why is this so? Although here is higher unemployment over the last 6 months to year or so most people are sill paying taxes same as before. I could understand some belt tightening, but why are state economies (seemingly) suddenly going off a cliff?
In states with a sales tax, obviously if people are spending less, the state is collecting less sales tax, for one thing. New Jersey’s casino revenues are down, for example, and I’d bet the sales tax receipts from new car purchases have decreased.
Also, states and municipalities do not just let the revenues sit in a vault somewhere. They invest it in something, hopefully something secure. When interest rates fall, so does that expected investment income.
Finally, those who are laid off not only aren’t paying income tax, or as much sales tax, they are also in most cases getting unemployment benefits, provided by the state.
[underlining is mine]
It’s not just people that pay taxes. Business entities also pay state taxes (sales tax and/or taxes on profits.) Obviously, business isn’t doing as well these days. However, that’s not the only reason states are in financial trouble.
Many of them (California for example) have had this trouble brewing for quite a while, and it’s just now starting to foam over the top.
Another factor is capital gains tax from sales of stocks and real estate. Not only are people not paying the state a percentage of their phat profitz, they may be incurring substantial tax-deductible losses that cut their tax bill and further depress state revenue.
If people aren’t buying cars, that’s a big loss in sales tax and vehicle registration fees.
In my part of the country, real estate taxes are the majority of local governments’ operating income. Considering foreclosure rates and falling home “values,” it’s easy to see why localities getting 80% or more of their income from housing-related tax revenue would be hurting.
Keep in mind that declining federal revenues can impact the states because of reduced federal spending. Here’s data for each state on the amount of federal tax paid and federal spending received annually from 1981-2005. (Interestingly, New Mexico is tops in getting the most “bang for its buck,” with New Jersey consistently getting the shaft. I wonder how far Illinois will climb up the list over the next 4 years).
I also don’t think most states practice sound fiscal behavior during the boom times because there’s so much pressure to spend any surplus to please the various constituent groups, and federal spending can help cover up any budgetary follies that occur. I’m not sure if any states actually do (or even should) stash their surpluses away for times such as these.
Some states do set aside money in “rainy day” funds, but as you said, in the good times, there are an infinite number of people with ideas on how to spend the surplus.
Pension funds have taken a huge hit while pension obligations continue to rise. The funding of the pension plans was often done with a rosy outlook based on the flawed notion of an ever rising stock market. Now the funds are undercapitalized.
If people drive less, fuel taxes go down. Usually a state tax is cents per gallon, not a percentage of sale price.
Put all this stuff together and you get revenue shortfalls. Many states (unlike the feds) have to balance their budget. It makes for some sleepless nights in the statehouse.
Wisconsin has one of the highest gas taxes in the nation. Like Spartydog said, it is cents per gallon (last I heard it was $.34/gallon).
When the gas prices went way up, people bought fewer gallons. Now gas prices have dropped, but the economy has gone to shit and people are still buying fewer gallons.
AFAIK falling home values shouldn’t be affecting property tax revenues too much yet; prices didn’t fall very much in the first half of the year.
Falling home values will decimate state and local tax bases next year, though.
As far as home values, in some localities the values are recalculated every year, some every two years or more.
Localities that recalculate every year should potentially reflect the market realities more closely. I’m sure they did this to keep up with rising home prices, but now it’s backfiring. So localities now have to deal with having less tax money, which hasn’t been the trend in the last decade or more.
In South Carolina, the idiots in charge of the state last year swapped property tax funding of schools for sales tax funding of schools. So schools went from relatively stable funding (property values don’t usually fall very fast or far, and are sluggishly responsive to economic downturns) to very UNstable funding.
South Carolina’s sales tax receipts are running something like 15% behind last year at this time. Guess what that means for the schools? :mad:
Personal income tax is usually a relatively small portion of state financing. Not insignificant, obviously, but not a real driver of revenue. Sales taxes and corporate income taxes are much more sensitive to economic downturns, and they make up significant proportions of state income. And we’ve gone from being frugal to being very spendthrifty at all levels of our society; states are no different. Thus, there isn’t much a state can easily do when a really bad economic downturn shows up. And this is gonna be a really, really bad one.
because many state budgets depend on variable taxes like sales and use taxes. As housing prices drop, so do property taxes.
…are because the hugely corrupt democratic party (which controls the state), has spent like a drunken sailor on crack, for the past 10 years. Cities and towns are drowing on school construction projects (undertaken when things were flush), and the corrupt democratic politicians have larded up tbhe payrolls with frinds and relatives (ex-senatepresident Willian Bulger gets $340,000/year in pension benefits). Plus, the disastrous Central Artery Project ( AKA "the “bi Dig”)-shoddy construction and graft-ridden contracts are causing the state to spend millions in fixing mistakes.
But who cares? The governeor (Deval Patrick) hired 1200 campaign workers! I am hoping this excess wil finally lead to bankruptcy, and a taxpayer revolt!
The short answer: incumbent politicians spending money they don’t have to win (or keep) the favor of special interest groups.
In other words politicians looking out for themselves first regardless of most everyone else being collateral damage to their actions.
Indiana does. It’s one reason the Hoosier state is in a much better situation than many others. A few years ago a politician ran on the premise that they’d give the Rainy Day fund back to the people in the form of a check. Luckily, cooler heads prevailed and we’ve got it now that we need it.
One unmentioned factor is Medicaid.
The biggest component of most state budgets is health care. Specifically, Medicaid. The feds pay for a lot of it, but states also pay about a 15-20% of their budgets on health care–higher in some states (I think California is more like 30%).
Because of our employer-based health care system, when unemployment goes up, a bunch more people start using government-subsidized medicine. Combine that with the all the increasing stresses on the system to begin with, and any marginal increase in burden hurts states tremendously.
This is so true. Scaramento has been using smoke and mirrors to call the budget ballanced when more money was being spent than was comming in. They raided funds that were not part of the general fund and wrote IOUs too call the funds secure. Now even less money is comming in and more going out and one party will not cut spending and the other will not raise taxes. In another month or two our state will be out of money.