Wednesday, February 17, 2010

A Balanced Approach to Closing State Deficits — Center on Budget and Policy Priorities

By Iris J. Lav

As states head into their third year of fiscal crisis most continue to face severe revenue shortfalls that require closing huge deficits. [1] As states prepare and consider budgets for the fiscal year that begins July 1, 2010 in most states, the choices they make about how to close those deficits have serious implications both in the short and long term. States that rely solely or primarily on widespread budget cuts to close deficits are harming residents and businesses that need immediate assistance; they also are reducing demand in the economy and impeding their state’s economic recovery.

Projections suggest that states collectively will need to close over $140 billion in deficits — beyond the federal funding being provided through the recovery legislation enacted in February 2009 to help states support education, health care, and other programs. If states were to close the entire $140 billion in deficits with budget cuts, the economy could lose as many as 900,000 jobs.[2] While there might not be any perfect choices for closing deficits in a recession this deep and long, it is clear that a balanced approach — rather than one that relies heavily or exclusively on spending cuts — is useful in mitigating the damage.

There are options available to states outside of the often cited “either-or” framework of tax increases and spending cuts. And while tax increases and spending cuts are important components of a balanced approach, how they are structured is critical for both residents and the state economy. This report examines seven components of a balanced approach to dealing with state deficits. They are:
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