Small Business Fact of the Week

State Government Revenue and Reliance on Feds

The story on budget deficits in the states is a two-part tale.

Too many elected officials only want to talk about one side of the story, i.e., the fall off in revenue due to the bad economy. That most certainly is critical to understand what's going on, but so is state government spending.

For example, according to the latest U.S. Census Bureau data, state government spending grew by 6.1% in 2008 compared to the previous year. From 2000 to 2008, state expenditures jumped by 60%.

As for total state revenues, they fell by a whopping 19 percent in 2008. Relative to 2000, though, revenues were still up 28.4 percent.

Interestingly, state tax collections actually increased in 2008 by 3.3 percent, and were up by 45 percent versus 2000.

So, to sum up, similar to what's happening at the federal level, despite big revenue declines, government spending keeps chugging along.

Meanwhile, as reported by Stateline.org, the National Conference of State Legislators released information on July 26 that most states expect to see increases in their general revenues in FY2011 (a 3.7 percent increase compared to a 1.5 percent decline in FY2010). However, for 2011 budgets already passed, budget gaps could top $12 billion, with state government deficits expected to hit $72 billion in 2012. According to NCSL, total reported state budget deficit estimates from 2008-2013 registered $537 billion.

In addressing the NCSL gathering in Kentucky, U.S. Senator Mitch McConnell noted concern over state and local government reliance on federal dollars. McConnell correctly pointed out that federal revenue now ranks as the single largest revenue category for state and local governments. In 2008, federal revenues to state and local governments registered $481.4 billion. Next in line in terms of size were state and local individual income taxes at $304.6 billion.

All of this further fuels uncertainty for consumers, entrepreneurs, businesses and investors. Spending at all levels of government push relentlessly higher, even as revenues plummet. This creates substantial risk that federal, state and local taxes will be increased - on top of substantial increases that already have been imposed. The business and investor communities are stuck wondering what such tax increases will do to business costs, state competitiveness, and economic growth, with consumers similarly worried about the effect on job creation.

If any of our elected officials are serious about economic recovery and new job formation, then the policy emphasis needs to be shifted in a completely different direction, i.e., towards reducing the size of government (which is crowding out the private sector) and cutting taxes to boost incentives for private sector risk taking.

Raymond J. Keating, Chief Economist