Q & A

Why are many states experiencing budget deficits?

During the economic boom of the 1990s, most states enacted permanent tax cuts. Also during this period, states began relying on capital gains and income from stock options and bonuses as a growing source of tax revenue (which are relatively more volatile revenue sources compared with ordinary earned income). Slow economic growth from the 2001 recession, a weak stock market and an increase in homeland security responsibilities in the wake of the terrorist attacks of Sept. 11, 2001, contributed to budget shortfalls.

Did states raise taxes during the recent recession?

Fewer than 20 states have raised taxes since the 2001 recession, whereas in the 1990-1991 recession nearly every state raised taxes in response to budget shortfalls.

Are current budget deficits due to a reduction in revenue, or have state expenditures increased also?

The growth in real per capita expenditures during the 1990s—averaging 1.4 percent from 1992 to 2000—was not greater than that of earlier decades. Real per capita expenditures for the past three years, however, rose by 1.3 percent, 3.4 percent and 1.3 percent, respectively. During these three years, real per capita state revenue fell by 0.2 percent in 2000, 1.9 percent in 2001 and 0.7 percent in 2002.

Didn't other periods of recession cause states to experience budget deficits?

Although it's not uncommon for states to experience budget deficits during recessionary periods, state budget surpluses prior to this recent recession were smaller than those prior to earlier recessions, thus increasing the chances that a reduction in revenue would lead to a budget deficit.

The Q & A information was adapted from “State Budget Crises: Cause and Effect,” which was written by Thomas A. Garrett and appeared in the November 2003 issue of National Economic Trends, a St. Louis Fed publication.


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