Budgets in Order to Address

Budgets In order to address the budget shortfalls that many states are facing and prescribe action, the nature of those shortfalls must be understood. State budgets as a whole could be short as much as $180 billion this year, and there are a number of contributing factors. Most states derive their revenues from two or three main sources. There are state revenue streams, such as state income taxes, fees and corporate taxes.

States also receive a substantial amount of their budgets in the form of federal transfers, as states are charged the local implementation of federal programs such as Medicaid and unemployment benefits. The current state budget crisis has been precipitated by the economic downturn. A decrease in economic activity has resulted in a decline in corporate and income tax revenues, and even revenues from fees (McCaffrey, 2010). From these revenues, states provide a number of social services to their residents.

Demand for many of those services, such as unemployment benefits and Medicaid, has increased as a result of the downturn and the increase in unemployment rates (Ibid). The Federal government, also having seen a decline in revenues, is providing an uncertain funding environment. Republicans blocked an extension of unemployment benefits, which will be passed on to the states, which must in turn cut benefits for people in time for the holidays.

It is unlikely that there will be any follow-up to TARP, as the current Congress and Senate have indicated a preference for other priorities which unfortunately will not do much to either stimulate the economy or improve state budgets. Compounding the issue for many states is that they have laws on the books that call either for balanced budgets or for spending cuts in times when revenues are reduced. This results in states having to cut their costs rapidly, without much consideration for the impact or effectiveness of such moves.

When federal transfer payments are less than anticipated, the cuts may have to come very quickly, as has happened in New Mexico for example (Massey, 2010). The challenge for states is to meet revenue declines as steep as 8.4% with service cuts equally steep in a very short period (McNichol, Oliff & Johnson, 2010). With little prospect for economic improvement, states must address their budget shortfalls in both the near and long, most having used up any reserves in bridging the gap between rapidly declining revenues and increasing costs.

The short version of the strategy in almost all states has been to increase revenues and cut services (McNichol, Oliff & Johnson, 2010). Raising revenues in a slumping economy is difficult, but there are ways to do this. In the case of New Mexico, revenues are declining rapidly, so revenue increases must be across the board to avoid hitting any particular sector too hard. The state has seen $1.2 billion in revenue declines since 2008 (New Mexico 2011 Budget), a function of reduced economic activity, so that trend must be reversed.

Increases in several fees will be recorded, including court fees, gas taxes and the state sales tax. Gas taxes in particular will be increased as a means of promoting alternate fuels. There will be an increase in the state lodger's tax, which taxes mainly out-of-state visitors and has a low elasticity of demand because of its relatively hidden nature. However, the largest portion of the state's revenues comes from the general state sales tax.

Increasing the state sales tax from 5.125% to 6.0% would increase the estimated revenues by approximately $300 million, bringing this revenue to its highest level in history. This rate would still be lower than the state sales tax rate in neighboring Southwest states such as Arizona (6.6%), Texas (6.25%), Nevada (6.85%) and California (7.25%) (Sales Tax Clearinghouse, 2010). With this increase, personal income tax rates would not need to be increased. Corporate income tax rates would also remain the same, as they are not a significant component of general revenues.

While the move to increase the state sales tax would prove unpopular, it would allow New Mexico to build for a more stable budget future, less reliant on federal transfers, while remaining competitive in terms of corporate and personal income taxes. Appropriations will also need to be cut in order to save money. The main problem with appropriations in the budget is that a looming and unexpected shortfall triggers rapid cutting of appropriations with little strategic purpose.

In addition to instituting 1-2% cuts in funding across the board (which will save between $50-100 million from the budget, the state needs to consider what services it will provide. The biggest budget areas are in Human Services, including unemployment benefits and medical assistance. Unemployment benefits should be reduced to reflect a reduction in federal transfer payments for this purpose.

The current budget project shows an increase of 29.9%, or around $165 million, and this should be scaled back to around $100 million by lowering payouts, reducing the payout period and tightening controls on long-term unemployment benefits. Another area of significant increase in the coming budget that needs to be curtailed in the long run is education spending, specifically at the college and university level. Higher education spending should be reduced down to fiscal 2009 levels, which would save the state $137 million.

Ultimately, while the state does gain some benefit from funding higher education, it is competing against private institutions for the same function. State funding provides an incentive to utilize state universities as a means of escape from the unemployment line,.