Times are tough for individuals and businesses across the nation. States have burned through their rainy day funds and are facing similar problems, with similar results. Unemployment is going to climb.
I live in California, perhaps the worst state in terms of budgeting this year. CNN reports California may need $7 billion federal loan
California may need a $7 billion emergency loan from the federal government to pay for “teachers’ salaries, nursing homes, law enforcement and every other state-funded service” this month, Gov. Arnold Schwarzenegger warns.
California was 85 days late passing their budget. They are already roughly a billion dollars in the red. This should lead to massive layoffs. The alternatives are limited. California can’t raise money in the bond market at cost-effective rates. If the emergency loan doesn’t go through, the only remaining alternative is an increased tax burden, which won’t fill the state coffers in time, anyway. California’s unemployment rate is already 7.7%. It’s going to get a lot worse before it gets better.
Virginia has recognized the need to downsize state government. Also from CNN, Virginia orders 570 state layoffs:
The cuts are the deepest in at least five years in Virginia. Kaine also said Thursday morning that college funding is being cut, state employee raises are being postponed and another 800 jobs will go unfilled.
How big is the problem? Here’s a snippet from For states, it’s a ‘worst-case scenario’:
States’ corporate income taxes fell 8.3% and sales taxes 1.4% in the second quarter from the year-ago period, according to a report from the Nelson A. Rockefeller Institute of Government, a public policy group. … Property taxes, which are a key source of funding for local governments, are expected to drop by 3.6% in 2008 as home values fall, according to the National League of Cities.
Tax revenues are falling across the board. States and localities have income taxes, property taxes, and sales taxes to raise funds. In the last recession, sales taxes increased while other sources shrank. This time, all sources are shrinking.
The article continues with a sobering data point: “Tennessee is looking to reduce its state workforce by at least 2,000 employees, or 5% of its workforce.” These workers will not be absorbed by private industry.
Not all states are making the necessary cuts. The article mentions:
Michigan and Maryland enacted tax increases, while New Hampshire and New York are increasing cigarette taxes, according to the Center on Budget and Policy Priorities. New Jersey, meanwhile, is eliminating property tax rebates for households with incomes of more than $150,000 and is reducing property tax rebates for some other residents. A public utilities tax that was scheduled to end in 2010 will continue to 2013.
I’m not sure about Maryland, but I know that residents of Michigan simply cannot afford increased taxes right now. Their unemployment has skyrocketed (think Detroit). The cigarette taxes are going to disproportionately hit the people that have already been hit hard. It’s unlikely that it will come out net positive for the state. Eliminating property tax rebates during a housing crisis cannot possibly work out well. The public utilities tax at least is already an existing tax, and not likely to have a huge new negative impact. Still, ending the tax would provide nice relief for residents and businesses.
From the Boston Globe, State layoffs imminent, lieutenant governor says:
“There will be layoffs that will occur,” Murray said at a press conference after he emerged from an hour long meeting with mayors from across the state. He did not provide specifics.
The article continues to say that local aid packages are safe and will only be cut as a last resort. As a corollary: I guarantee that scenario will unfold. Local aid packages cannot be counted on. Local governments need to prepare accordingly.
Interestingly, there is also a measure on the Massachusetts’ state ballot to repeal the state income tax. Time will tell how severe the taxpayer revolt is. I doubt any state employees will be voting for the initiative.
