WASHINGTON -- The states are in weak financial condition and could be in worse shape next year, according to separate reports by the nation's governors and state legislatures.
Despite record tax increases and near-record spending constraints, an advance copy of a survey due to be released Nov. 11 by the National Conference of State Legislatures shows that state financial conditions continue to "deteriorate" because of the recession.
And a similar survey released this week by the National Governors' Association predicts that the weak and possibly faltering recovery from the recession could force states to make budget cuts that are even deeper than thos made this year.
The state legislatures' survey says that states made up for revenue shortfalls triggered by the recession by raising texas a record $16.2 billion this fiscal year while holding the growth in spending to less than 1% above inflation.
The tax increase is not only the largest dollar amount in history at the state level, but at 5.4% of 1990 tax collections, is the biggest percentage increase since 1971, the survey reports. And it follows a banner year in fiscal 1991, when taxes were raised by $9.5 billion.
Although two-thirds of the states are imposing tax increases this year, the astounding $16.2 billion total "does not accurately depict the tax environment in most states" since California's $6.6 billion increase represents 39% of the total and Pennsylvania's $3.2 billion increase accounts for another 20%, the report says.
Nevertheless, "the size of the increase in fiscal 1992 reflects the seriousness of fiscal problems in many states," it continues.
The severity of the states' problems also was evident by the imposition of taxes both this year and last in major revenue-raising categories such as as personal and corporate income taxes, sales taxes, and use taxes, the report states.
Despite the unprecedented tax hikes and spending constraint, the report notes a "paradox" in that state financial conditions continue to "deteriorate" because of the recession. Reserves have fallen by 60% in the last year, to the lowest level on record -- $3.8 billion or 1.2% of general spending -- and are not expected to recover anytime soon.
Some economists have blamed the large tax increases and austere budget cuts being imposed right now by states and local governemnts for adding to the weak recovery and growing danger that the economy could fall back into recession after a brief recovery this summer. Fears of a "double-dip" recession have increased in recent weeks with reports of continuing layoffs both by businesses and governments.
The survey points out, however, that statutory or constitutional balanced budget requirements in all the states but Vermont force those states to take draconian measures when a business recession causes their tax collections to fall off.
In the last major recession in 1982 and 1983, states enacted a large tax increase, the report says. But as the recession ended and revenues recovered, they rolled back or repealed a good portion of the new taxes and, by 1985, had enacted an aggregate tax cut.
Economists say the stringent fiscal policy at the state and local level is particularly damaging in this recession, however, because Congress has been immobilized by a ballooning federal deficit and is able to do nothing further to stimulate the economy. Thus, there is no antirecession policy in place at any level of government right now.
The irony is that the weak economy, which is due in part to state and local austerity, in turn is threatening to create another year of financial hardship and revenue shortfalls for the states, according to the legislatures' survey. Despite reports this summer that the recession had ended, "the depressed condition of state finances continues," the report says.
The National Governors' Association gave an even more forceful warning in its state fiscal survey, saying that the recession and weak recovery "could easily result in a year of budget cuts that is far worse than the year just ended."
"States will continue to face tough times ahead, even when the recession ends, because economic growth will be slower than it was in the 1980s, while needs are increasing," said the association's executive director, Raymond Scheppach in releasing the report.
The surveys note that the states provided such meager amounts to spending programs in fiscal 1992 that outside factors appear destined to "upset budget plans" later this year.
"Costs for some categories of state spending such as Medicaid, corrections, and education are all likely to be significantly higher than appropriations for fiscal 1992, just as they were for fiscal 1991," said the legislatures' report.
Also, "external economic and political forces such as health-care cost inflation, federal mandates, judicial court orders, and public demands to combat crime and improve education could drive many spending categories well beyond project levels," it said.
