Tuesday, January 12, 2010

The Naughtful Naughties: State Tax Revenues

Just quickly passing along another chart today, this one courtesy of the The Business Insider's Chart of the Day (click on the chart to pop up a full-size version):

What I find especially noteworthy in this chart is the extent to which the two recessions of the Naughts led to far greater decreases in state revenue that we saw in any of the recessions of the previous forty years. We might have expected the biggest drop in state revenue to come from the Great Recession at the end of the decade, but what happened in the recession that started the decade? Why was it so much worse for state governments than previous recessions?

I suspect the answer lies in some combination of changes in the source of tax revenues and an unwillingness to raise taxes at the state level to make up for revenue shortfalls. But I don't know. It certainly seems an interesting area for further research.

Opinions differ on tax rates (to put it mildly!) and a lot of folks see less tax money going to state government as an inherently good thing. One thing we can all agree on is that decreased revenues lead directly to state cutting services (education, infrastructure, policing, etc.) for the citizens of that state, pushing the burden of providing those services down on local municipalities that are dealing with their own revenue shortfalls, or engaging in accounting chicanery to balance the books for that year. In Michigan -- where we never really got that mid-decade bump upwards in revenues -- we've seen all three.

What worries me about the increasing volatility of state revenues shown in that chart above is that it leads state governments to seek short-term solutions that have bad long-term results. A few years ago in Michigan we sold off the long-term revenue stream from our tobacco settlement to use the money to plug immediate budget holes. Now we have the same structural budget holes, with even less revenue than ever to weather the current crisis.

Arizona plans to sell off and re-lease their state government buildings to plug the cash-flow hole in this year's budget. Is this a good long-term deal for the citizens of the state? No. But given the sort of precipitous decline in state revenues shown above, I can see how it might be an appealing quick fix to a state government. The same goes for privatizing lotteries, selling off park land, and a host of other options that all of you have probably heard floated from your own state governments.

As you can see from the chart above, fiscal crisis management is the order of the day for our state governments. But it isn't necessarily leading to better government.


  1. PA just passed table games in addition to already legal slots. You may soon be able to view our historic battlefields and then lose lots of money at a casino all in one trip.

  2. The chart is impressive, but its complexity is a daunting. GDP data are annualized quarters as BEA reports them. State data are reported in current, not in real dollars, by the Census, and the authors don't say how they deflated those. Averaged %-changes are supposedly compared with "year ago two-quarter moving averages". What?? I've plotted data in the clear and did not produce the extremes shown here, hence suspect that these manipulations result in exaggerations--pleasing to the chart makers. Actual quarterly data, as reported by Census, fluctuate a great deal. I think your conclusions are all right, but the chart bothers me.

  3. Quick note for those interested in digging a bit deeper into the state and local tax numbers. Arsen does so on his LaMarotte blog, here: http://adarnay.wordpress.com/2010/01/13/state-tax-revenues-scale-effects/