Pew Report on State Budget Troubles: Good Research But Misses Causes

November 12, 2009

The respected Pew Center on the States released a report “Beyond California” this week assessing the state budget situation in the U.S., and suggesting that ten states are in serious fiscal trouble: California as well as Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island, and Wisconsin.

The Pew authors evaluated the states on six “indicators” they find in California: (1) high foreclosure rates, (2) increasing unemployment, (3) loss of state revenues, (4) relative size of budget gaps, (5) “legal obstacles to balanced budgets,” and (6) poor money-management practices.

I have two primary critiques of that, although I first must say that it is exhaustively researched and contains much useful information. Pew’s list of states in budget trouble is pretty much on the money, and they did a good job using information from many different sources (including us).

First, however, the Pew study focuses on effects, not causes. Since Pew is essentially trying to predict where the next California will be, not looking at causation means the report is limited in how persuasive it can be about solutions and predictions. Falling state revenues didn’t cause California’s budget crisis; it is an effect of (or even the same thing as) the budget crisis.

A big cause of California’s budget crisis was spending commitments derived from overreliance on volatile revenue sources, particularly taxes on high-income earners, corporate profits, and capital gains revenue. These revenue sources soared during the boom, and legislators made spending commitments as if that soaring would never end. It did, and that’s where the budget hole came from, in many states. Pew doesn’t mentions volatility at all, except to criticize Oregon for not having a sales tax and Arizona for relying too much on one.

Second, a key argument of the report seems to be to criticize budget supermajority requirements but it falls quite short. It is a truism that supermajority requirements make it harder to raise taxes; Pew’s “obstacle” is my “taxpayer protection.” Any legislative process other than allowing a strongman to decree a tax increase has “obstacles,” and I could expand at length why supermajority requirements help weed out unwise or problematic legislation. The governors of Rhode Island and Hawaii have vetoed tax increases this year so I imagine the veto is a “legal obstacle to balanced budgets.” There is no discussion of “obstacles” to spending cuts, such as entrenched public employee union rules or strings attached to federal stimulus aid.

Pew claims that the supermajority is “a factor in recurring budget troubles” in California. But California isn’t a low tax state; quite the contrary. The problem isn’t that taxes are too low in California. It’s that spending growth outstripped revenue growth. 17 states have a supermajority requirement and their budget situations vary dramatically. Supermajority requirements are a red herring.

(On a side note, the report cites a Nevada Supreme Court ruling suspending the supermajority requirement. They do not note that the court unanimously reversed that decision three years ago after intense criticism. I don’t often use the phrase “judicial activism” but that a court was willing to suspend a constitutional provision comes close.)

The Pew report offers much valuable analysis, including much needed discussion of out-of-control state government pension obligations. Both experts and novices can get a good picture of the state budget situation from the study. But the focus on the “six indicators” and the policy implications that come out of it leave much to be desired.



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