Budget Processes and the Great Recession: How State Fiscal Institutions Shape Tax and Spending Decisions

Source: Kim Rueben, Megan Randall, Aravind Boddupalli, Urban Institute, July 16, 2018

As states enter the 2019 fiscal year, most have passed budgets on time and are finally logging tax revenues at pre-Great Recession levels, arguably exhibiting the highest degree of fiscal health since the recession’s 2009 trough. While many states have seen notable annual revenue growth over the last five years, in as recently as 2017 ten states struggled to pass a budget on time. In October, 2017, for example, Connecticut Gov. Dan Malloy approved the state’s two-year $40.2 billion budget more than 100 days after the fiscal year began. Representing a strong bipartisan effort, the package included spending cuts, new taxes and fees, and new fiscal controls meant to stabilize the state’s financial future. These controls included strengthening revenue and spending limits and specifying how money should be deposited into a rainy day fund – the assumption being that additional fiscal controls would help the state move toward a more sustainable fiscal path.

What evidence, however, shows that fiscal institutions, such as those adopted by CT, help states respond to unexpected fiscal or economic pressures? Following up on previous literature, new data and the magnitude of states’ fiscal challenges during the Great Recession make this an important time to reexamine the role of budget rules in determining state fiscal health and helping states weather fiscal uncertainty.

Related:
View Rueben’s slides
View Watkins’ slides
Ben Watkins (State Board of Administration, Florida)