Category Archives: State & Local Finance

Tax Policy Center Establishes “Opportunity Fund” to Support Tax System Research and Analysis

Source: Urban Institute, June 18, 2008

From the press release:
The Urban-Brookings Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, has launched a new intellectual venture capital fund to help policymakers, the public, and the media better understand the U.S. tax system and the policy challenges facing the nation over the next decade. The Opportunity Fund has been awarded a $2.5 million challenge grant from the Gates Foundation, which will match one dollar for every three dollars the fund receives before April 1, 2011…
…The Tax Policy Center envisions using the Opportunity Fund to develop prototype tax reform options and clear assessments of their pros, cons, tradeoffs, and burdens; strengthen its capacity to analyze state, local, corporate, and international taxes; model the macroeconomic effects of current budget policies and escalating government debt; and allow users of www.taxpolicycenter.org to customize tables based on the center’s data and analysis, letting the public see how proposed and enacted legislation affect them and others.

Facing deficits, many states are imposing cuts that hurt vulnerable residents

Source: Center on Budget and Policy Priorities

From the summary:
To date, at least 18 states have made or proposed budget cuts that threaten vital services for many residents, including some of the state’s most vulnerable residents. Examples include:
+ Public health programs: At least 12 states have implemented or are considering cuts that will affect low-income children’s or families’ eligibility for health insurance or reduce their access to health care services. For example, Rhode Island’s governor has proposed eliminating health coverage for nearly 7,400 low-income parents; New Jersey’s governor has proposed cutting funds for charity care in hospitals by 15 percent; and California’s governor has proposed requiring many low-income families to pay more for their children’s health care.
+ Programs for the elderly and disabled: At least five states are cutting or proposing to cut medical, rehabilitative, home care, or other services needed by low-income people who are elderly or have disabilities, or significantly increasing the cost of these services. For example, Florida has frozen reimbursements to nursing homes and relaxed staffing standards and Rhode Island is requiring low-income elderly people to pay more for adult daycare.
+ K-12 education: At least 10 states are cutting or proposing to cut K-12 education; three of them are proposing cuts that would affect access to child care. For example: Florida cut school aid by an estimated $130 per pupil; Nevada eliminated funds for gifted and talented programs, and Arizona is considering eliminating child care subsidies for approximately 3,200 children in low-income working families.
+ Colleges and universities: At least 14 states have implemented or proposed cuts to public colleges and universities. For example, Florida has cut university budgets and community-college funding; and Kentucky and Virginia have cut university funding for the current fiscal year by 3 percent and 5 percent, respectively. Colleges and universities in these states are increasing tuition by 5 percent to 9 percent.
+ State workforce: At least 11 states have proposed or implemented reductions their state workforce. Workforce reductions often result in reduced access to services residents need. It also ads to states’ woes by contracting the state economy. New Jersey has proposed reducing the workforce by 3,000 employees through early retirement, lay-offs and attrition, leading an independent monitor to express concern about the impact on abused or neglected children losing experienced caseworkers; in Kentucky, the public defender will eliminate 10% of positions and decline certain types of cases; hiring freezes have been instituted in Arizona, California, Delaware and Minnesota.
When states cut spending, they lay off employees, cancel contracts with vendors, reduce payments to businesses and nonprofits that provide services, and cut benefit payments to individuals. All of these steps remove demand from the economy, which only worsens a downturn. Tax increases also remove demand from the economy by reducing the amount of money people have to spend.

Full Report (PDF; 71 KB)

Hidden Consequences: Lessons From Massachusetts For States Considering A Property Tax Cap

Source: Phil Oliff and Iris Lav, Center on Budget and Policy Priorities, May 21, 2008

From the summary:
In 1980 Massachusetts voters approved Proposition 2 ½, which mandates that property tax revenues not exceed 2.5 percent of a community’s assessed value and that a community’s property tax revenue not grow by more than 2.5 percent a year.

Budget Management Capacity of State Governments: Issues and Challenges

Source: Katherine G. Willoughby
Public Performance & Management Review
Volume 31, Number 3 / March 2008

Dramatic events early in the new millennium offer an especially interesting period for consideration of how state governments in the United States have coped. In the years since the September 11 terrorist attack, states have been beset with economic recession, a federal focus on homeland security, and the war in Iraq, as well as debilitating natural disasters. How well have states managed through these fiscal, political, economic, natural, and international storms? This research examines state government budget management capacity as measured by a 50-state survey to understand the challenges faced by states, the advancements made to support best practices in budgeting, and the problems that remain. Findings tease out bright spots–states have worked hard to reach and maintain a long-term budgeting perspective, particularly by improving the accuracy of revenue and expenditure estimates. Also, many states have improved budgeting transparency by increasing citizen access to budget information, documents, and budget discussions. On the other hand, state budget management progress suffers from the politics of budgeting: More states are having difficulty passing the budget on time, antiquated tax structures are intransigent, and political expediency takes precedence over principles of good budget management. In the end, the political discipline necessary to reach compromise regarding the budget, and to work toward budget balance, will suppress state budget management progress.

Hidden Consequences: Lessons From Massachusetts For States Considering A Property Tax Cap

Source: Phil Oliff and Iris Lav, Center on Budget and Policy Priorities, May 21, 2008

From the summary:
In 1980 Massachusetts voters approved Proposition 2 ½, which mandates that property tax revenues not exceed 2.5 percent of a community’s assessed value and that a community’s property tax revenue not grow by more than 2.5 percent a year.

Over the two and a half decades Proposition 2 ½ has been in effect, Massachusetts’ level of property taxation has declined. Between 1980 and 1985, property taxes as a percentage of income fell from 76 percent above the national average to 13 percent above the national average, where it stands today. (Massachusetts localities rely more on the property tax than localities in much of the rest of the country because they are not permitted to levy sales or income taxes or various other forms of taxes.

Because Proposition 2 ½ lowered property taxation in Massachusetts, advocates of limited taxation often cite it as a model for reform. But the story is far more complicated than that. State aid has helped fill in some of the gaps in local funding the law created, but not all of them and not reliably over time. Furthermore, the local “overspending” that proponents claimed Proposition 2 ½ could curb did not exist in the imagined quantities, and necessary public services have been jeopardized.

“Why Don’t Some States and Localities Pay Their Required Pension Contributions?”

Source: Alicia H. Munnell, Kelly Haverstick, Jean-Pierre Aubry, and Alex Golub-Sass, Center for Retirement Research at Boston College, Issue in Brief, SLP #7, May 2008

The brief’s key findings are:
• Over 40 percent of plans in our sample failed to make their annual required contribution (ARC) in 2006.
• Two thirds of these plans faced legal constraints on their contributions, but many are gradually adjusting their limits.
• For the unconstrained plans, the following factors are associated with a failure to make the ARC:

o The plan uses a less rigorous cost method;
o The plan is large; and
o The plan is in a state with a relatively high debt burden.

Unemployment Insurance Financing: Examining State Trust Funds Facing Recession

Source: Rick McHugh and Andrew Stettner, National Employment Law Project, Briefing Paper, May 2008

As state UI trust funds face a looming economic downturn, NELP has released a briefing paper today that looks at overall UI financing as well as giving a state-by-state breakdown of current trust fund reserves compared with common UI solvency measures. “Unemployment Insurance Financing: Examining State Trust Funds Facing Recession” looks at the current status of state trust funds and examines the question of why states are less solvent in 2008 than they were prior to the 2001 recession. NELP also describes policies that states should adopt to strengthen their UI financing mechanisms so that UI programs can better assist both jobless workers and a state’s economy during recessions.

Included in the paper are explanations of how UI solvency is measured, comparisons of current state solvency status with each state’s solvency situation prior to the 2001 recession, and findings that 21 states have adequately solvent trust funds while as many as 18 states face serious solvency challenges in an upcoming recession. Michigan, Missouri, New York, and Ohio are the states with the nation’s lowest UI trust fund solvency at this time.

Why Does Funding Status Vary Among State and Local Plans?

Source: Alicia H. Munnell, Kelly Haverstick, and Jean-Pierre Aubry, Center for Retirement Research at Boston College, State and Local Pension Plans #6, May 2008

From the summary:
While state and local pensions as a group are about as well funded as plans in the private sector, significant variation exists. More than 60 percent are adequately funded, but almost 40 percent are not. Low levels of funding means that future taxpayers will have to pay the cost of unfunded pension promises, as well as the unfunded costs of retiree health insurance. Alternatively, if taxpayers balk at covering these pension commitments, future beneficiaries risk losing benefits, such as ad hoc cost-of-living increases.

State and Local Revenues

Source: Kim Rueben and Carol Rosenberg, Urban Institute, April 14, 2008

From the abstract:
State and local revenues have been relatively stable over the last 30 years, growing from 13.5 percent of GDP in 1972 to 16.3 percent in 2005. However, as shown in the table, the composition of revenues has changed, with property taxes declining from 25.6 percent of revenues to only 16.6 percent. Much of this decline occurred in the 1970s.

The Robust Relationship between Taxes and U.S. State Income Growth

Source: Robert Reed, National Tax journal, Vol. LXI, No. 1, March 2008

I estimate the relationship between taxes and income growth using data from 1970–1999 and the forty–eight continental U.S. states. I find that taxes used to fund general expenditures are associated with significant, negative effects on income growth. This finding is generally robust across alternative variable specifications, alternative estimation procedures, alternative ways of dividing the data into “five–year” periods, and across different time periods and Bureau of Economic Analysis (BEA) regions, though state–specific estimates vary widely. I also provide an explanation for why previous research has had difficulty identifying this “robust” relationship….