Survived Recession? Get Set for Higher State, Local Taxes

If the global recession didn’t leave you black and blue, get ready for a heavy dose of the state and local budget blues.

Americans who managed to keep their job and income steady, even though the value of their home and investment portfolio is down over the past two years, can look forward to higher taxes and fees, fewer services and, as a result, less pocket money.


"It's just becoming evident now," says Chris Hoene, director of research for the League of Cities. "It's very sobering."

State budget gaps will probably get worse before they get better over the next two years, unless the federal government extends tens of billions of dollars in aid, originated under the massive stimulus program of 2009.

The recession's other shoe, so to speak, may come as a surprise to some, but economic recovery at the state and local level tends to lag the national one by one to two years, as tax revenue—the chief source of income—catches up to events.

Unusually high unemployment will aggravate the revenue recovery this time around, following a 13-percent decline in revenue over the three most recent quarters, according to the Rockefeller Institute of Government.

"We haven't bottomed yet," says Ray Scheppach, executive director of the National Governors Association. "Every time we revise a forecast down, the actuals come in below that."

Even after two straight years of budget cuts averaging 4.5 percent a year, states face fiscal-year deficits of $180 billion in 2011 and $120 billion in 2012, according to a recent analysis by the Center on Budget and Policy Priorities.

Massive federal aid covering Medicaid and other services has helped cut deficits by a third since enactment a year ago, but the rate of funding is beginning to slow. The last of the stimulus money--$40 billion—hits in the first half of 2011, although Congress is now close to extending the Medicaid part for two-quarters.

The municipal sector is hardly any better off, facing an estimated shortfall of $56 billion to $83 billion between 2010-2012, according to the League of Cities.

If that weren't bad enough, thousands of cities, towns and counties are going to get a bitter lesson in trickle-down, food-chain economics.

“States push on the problem to local government,” says Ethan Pollack of the Economic Policy Institute.

Pollack and others say states will cut more aid to local governments as they struggle to balance budgets. The easy cuts have been made and the rainy day funds exhausted. The usual accounting tricks, such as pushing expenses forward, can't be sustained.

"You're looking at anything and everything--in many cases this is local aid," says Todd Haggerty, a policy specialist at the National Conference of State Legislators.

Education is particularly vulnerable, since an average 21 percent of state budgets goes to elementary and secondary (K-12) education. And even with the federal aid—about $40 billion for 2009-2011—30 states have cut funding for both K-12 and higher education in 2010.

Almost three dozen states already have budget blueprints for fiscal 2011, which in many cases starts July 1.

Virginia, Georgia and South Carolina are all looking for education cuts of 10 percent or more. California will lop off $1.5 billion, New York $1.1 billion, according to a analysis by the budget center.

More broadly, Colorado would cut $250 million in local government aid. Wyoming wants to cut it by more than half.

On the local level, the Los Angeles, Calif. United School District says its worst-case budget plan is for 8,000 layoffs, according to a recent report by the National Conference of State Legislators.


"Hundreds and hundreds of teacher jobs are at risk," Ronald O. Loveridge, president of the National League of Cities and mayor of Riverside, Calf., told a news conference Wednesday.

Cities are now also cutting police and fire department jobs as well as releasing prisoners early. Social safety net services for the children and the poor are being cut.

"The problem is you're cutting services that are basic services or you have to start cutting services that are in greater demand because of the of the recession," says Christian Weller, an economist who specializes in public policy for the University of Massachusetts and the Center for American Progress. "The states do not offer luxury products."

On top of that, local governments are facing their own revenue declines, from their principal source.

"I don’t think the full impact of property tax declines has hit them," says Scheppach.

Many local governments are still weaning themselves from the bust of the retail-housing boom, which brought an income stream of fees and taxes.

“They were riding revenues that were based purely on new growth,” says Hoene.

Replacing revenue and cutting costs, however, can backfire, especially with the economy's fragile recovery, affecting discretionary spending.

“These decisions take demand out of the economy and that’s why you have to weigh them carefully,” says Liz Nichols, senior fellow at the Center on Budget and Policy Priorities.

With such a dour outlook, cities have managed to get the attention of Congress.

House Democrats and municipal organizations—including Loveridge's—outlined legislation Wednesday that would provide $75 billion over two years to help municipalities save and replace jobs. The money would go directly to local government.

Federal aid may help smooth the way out of a nasty recession, but some say the budget crisis will have repercussions for years, maybe even decades to come.

Scheppach says it's a wake-up call. "We're telling governors you need to downsize state government."