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Crushing State Budget Cuts Wiping Out Stimulative Effects of Tax Deal

California Governor Jerry Brown (D).

Today, Jerry Brown announced his fiscal plan for the next 18 months, and it’s not pretty at all. He’ll make an effort to save current tax increases which are set to expire, reducing the pain somewhat, but you’re still looking at major budget cuts to almost all sectors.

The spending plan eliminates an 18-month budget gap estimated at $25.4 billion, comprised of a current year shortfall of $8.2 billion and a budget year shortfall of $17.2 billion. A combination of $26.4 billion in actions is needed in order to have a $1 billion reserve. In addition, the deficit will grow to $26.6 billion if the proposed sale of state office buildings, blocked by court order, does not proceed, requiring $27.6 billion in budget actions in order to have a reserve.

Brown’s budget proposes $12.5 billion in spending reductions, $12 billion in revenue extensions and modifications, $1.9 billion in other solutions to close the gap and provide for a $1 billion reserve.

Major spending reductions include $1.7 billion to Medi-Cal, $1.5 billion to California’s welfare-to-work program (CalWORKs), $750 million to the Department of Developmental Services, $500 million to the University of California, $500 million to California State University, and $308 million for a 10 percent reduction in take-home pay for state employees not currently covered under collective bargaining agreements. Brown also plans to trim state government operations by $200 million through a variety of actions, including reorganizations, consolidations and other efficiencies.

If you’re going to deal with the budget honestly, there aren’t many other options on a way forward, at least in the interim. Maybe after a few years of sound budgets you can ask Californians to tax the rich. Saving the current tax increases, which have mostly to do with the regressive sales tax, while hoping to cut some corporate tax breaks at the margins, is maybe the best possible option. And yet virtually all these solutions have already been rejected by voters at least once.

In Illinois, they’re skipping the intermediate steps and going right to the taxation:

With Illinois’s budget crisis reaching dizzying, desperate levels, lawmakers here over the weekend were seriously pondering something that would have been unimaginable even a few months ago: a 75 percent increase in the state’s income tax.

That was just one element in an enormous, controversial and still evolving financial package the state’s top political powers dreamed up in private meetings here. On Sunday, they were racing to find enough support to push it through before a new crop of lawmakers takes over on Wednesday.

In a state where the budget woes have, by some estimates, grown more dire than even those in California, it seems that months of inaction might at last be overtaken by some combination of timing (elections are far away) and fear (the state’s national reputation and bond ratings seem to be sinking as fast as its debts are mounting).

In a moment when states around the country are wrestling with withered revenues, Illinois faces a deficit of at least $13 billion; more than $6 billion in unpaid bills to social service agencies, schools and funeral homes; the most underfinanced state pension system; and growing signs of concern from bond investors.

Between California and Illinois, you’re looking at about $45-48 billion dollars to balance budgets, between tax hikes and program cuts. The anti-stimulative effect of that almost totally wipes out the $55-60 billion in stimulative measures that aren’t just extensions of current law in the tax cut deal.

That’s not a commentary on how the tax cut deal could have ended state budget crises (although an innovative policy solution could have at least put that in motion and at lesat begun to set up some counter-cyclical fund so states don’t have to contract during recessions). It’s more a commentary on how economic forecasters assumed major growth from this tax cut deal, even though it’s almost entirely composed of poor stimulus and would be overwhelmed by budget cuts at the state and probably federal level. Austan Goolsbee likes to talk up the stimulative power of that tax cut deal, but he’s looking at it in a vacuum. Fiscal policy in 2011 and 2012 is still very likely to be contractionary, and nobody in Washington is arguing for that to change. Vain hopes of “stimulus” seem very odd, in this context.

CommunityThe Bullpen

Crushing State Budget Cuts Wiping Out Stimulative Effects of Tax Deal

Today, Jerry Brown announced his fiscal plan for the next 18 months, and it’s not pretty at all. He’ll make an effort to save current tax increases which are set to expire, reducing the pain somewhat, but you’re still looking at major budget cuts to almost all sectors.

The spending plan eliminates an 18-month budget gap estimated at $25.4 billion, comprised of a current year shortfall of $8.2 billion and a budget year shortfall of $17.2 billion. A combination of $26.4 billion in actions is needed in order to have a $1 billion reserve. In addition, the deficit will grow to $26.6 billion if the proposed sale of state office buildings, blocked by court order, does not proceed, requiring $27.6 billion in budget actions in order to have a reserve.

Brown’s budget proposes $12.5 billion in spending reductions, $12 billion in revenue extensions and modifications, $1.9 billion in other solutions to close the gap and provide for a $1 billion reserve.

Major spending reductions include $1.7 billion to Medi-Cal, $1.5 billion to California’s welfare-to-work program (CalWORKs), $750 million to the Department of Developmental Services, $500 million to the University of California, $500 million to California State University, and $308 million for a 10 percent reduction in take-home pay for state employees not currently covered under collective bargaining agreements. Brown also plans to trim state government operations by $200 million through a variety of actions, including reorganizations, consolidations and other efficiencies.

If you’re going to deal with the budget honestly, there aren’t many other options on a way forward, at least in the interim. Maybe after a few years of sound budgets you can ask Californians to tax the rich. Saving the current tax increases, which have mostly to do with the regressive sales tax, while hoping to cut some corporate tax breaks at the margins, is maybe the best possible option. And yet virtually all these solutions have already been rejected by voters at least once.

In Illinois, they’re skipping the intermediate steps and going right to the taxation.

With Illinois’s budget crisis reaching dizzying, desperate levels, lawmakers here over the weekend were seriously pondering something that would have been unimaginable even a few months ago: a 75 percent increase in the state’s income tax.

That was just one element in an enormous, controversial and still evolving financial package the state’s top political powers dreamed up in private meetings here. On Sunday, they were racing to find enough support to push it through before a new crop of lawmakers takes over on Wednesday.

In a state where the budget woes have, by some estimates, grown more dire than even those in California, it seems that months of inaction might at last be overtaken by some combination of timing (elections are far away) and fear (the state’s national reputation and bond ratings seem to be sinking as fast as its debts are mounting).

In a moment when states around the country are wrestling with withered revenues, Illinois faces a deficit of at least $13 billion; more than $6 billion in unpaid bills to social service agencies, schools and funeral homes; the most underfinanced state pension system; and growing signs of concern from bond investors.

Between California and Illinois, you’re looking at about $45-48 billion dollars to balance budgets, between tax hikes and program cuts. The anti-stimulative effect of that almost totally wipes out the $55-60 billion in stimulative measures that aren’t just extensions of current law in the tax cut deal.

That’s not a commentary on how the tax cut deal could have ended state budget crises (although an innovative policy solution could have at least put that in motion and at lesat begun to set up some counter-cyclical fund so states don’t have to contract during recessions). It’s more a commentary on how economic forecasters assumed major growth from this tax cut deal, even though it’s almost entirely composed of poor stimulus and would be overwhelmed by budget cuts at the state and probably federal level. Austan Goolsbee likes to talk up the stimulative power of that tax cut deal, but he’s looking at it in a vacuum. Fiscal policy in 2011 and 2012 is still very likely to be contractionary, and nobody in Washington is arguing for that to change. Vain hopes of “stimulus” seem very odd, in this context.

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David Dayen

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