Journal Article

States in fiscal distress

Abstract: The 2007-10 recession has imposed significant fiscal hardships on state and local governments. The result has been state budget deficits and the need to increase state taxes, cut spending, and withdraw funds from state ?rainy day? accounts. The primary cause of state budget ?gaps? has been the rise in the level of state unemployment. There is no evidence that these gaps are related to state political institutions, a state?s prior receipt of federal funding, or possibly favored access to key congressional budget committees. The federal government has responded to these gaps with the passage of the American Recovery and Reinvestment Act (ARRA) of 2009 to aid states in fiscal distress and provide economic stimulus. Though intended as insurance for fiscal distress, ARRA covers at most $0.23 of each dollar of a state?s recession-induced budget gap. These funds are provided through a large per capita payment to each state, independent of any level of state deficit. AARA was also intended as targeted assistance for stimulating local economies, but its funding is uncorrelated with state unemployment rates. ARRA funding appears to be decided by congressional politics, given Congress?s desire to pass a major spending and tax relief package as quickly as possible. States are important ?agents? for federal macroeconomic policy, but agents with their own needs and objectives.

Keywords: American Recovery and Reinvestment Act of 2009; state finances;

Status: Published in Proceedings of a conference co-hosted by the Federal Reserve Bank of St. Louis and the Weidenbaum Center at Washington University in St. Louis on the current status of state and local public finance, fiscal federalism in the United States, an economic evaluation of state and local taxes, and non-traditional revenue sources for state and local governments, April 9, 2010.

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Regional Economic Development

Publication Date: 2010

Issue: Oct

Pages: 65-80