States Bought the False Fiscal Promise of the Bubble
Michale Hill of the Associate Press does a good job of describing the fiscal mess states got themselves into by acting as if the revenue windfall during the debt-fueled housing bubble was a new state of normal that would last forever:
The decline in state tax revenue is expected to drag on even after the economy begins to rebound. Without higher taxes, bigger cuts to government services, or more federal funding, the states face budget gaps that could reach $120 billion nationwide in their 2011 budgets, according to the Rockefeller Institute, a think tank in Albany.
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States simply are not taking in enough money to cover expenses that are rising with the recession. So far, neither the spending cuts nor the tax and fee increases being discussed appear large enough to address the impending revenue shortfall, economists said.
Spending increases were easier to cover in flush times this decade, when tax collections jumped 40 percent over five years. Then the bubble burst. Inflated housing wealth collapsed, consumers hunkered down, businesses slashed jobs, and tax collections plunged.
(Boldface added)
For example, Massachusetts Governor Deval Patrick, who was a board member at subprime mortgage lender Ameriquest during the height of the housing bubble, entered office full of wild spending ideas, clearly assuming the fiscal party, the Bush Bubble, would go on and on. Now that he’s faced with a tough economy that actually requires work and thought he’s turned out to be in completely over his head.
Strangely, the Rockefeller Institute report (PDF) doesn’t break out projected shortfall by state, which would have helped since California alone is likely to produce a substantial chunk of the aggregate deficit (or over spending) in state budgets.
