Kennedy School White Paper: States facing serious financial crunch as new fiscal year begins

Contact: Doug Gavel
Phone: 617-495-1115
Date: June 30, 2004

Cambridge, MA – As state governments across the country begin their new fiscal year, they continue to experience serious financial problems despite the turnaround in the national economy, and the fiscal crunch may last through the decade. That’s the conclusion of a new White Paper authored by two faculty members at Harvard’s Kennedy School of Government.
The report, titled “Facing the Fiscal Crises in State Governments: National Problem; National Responsibilities,” resulted from a conference last year sponsored by the Kennedy School’s Taubman Center for State and Local Government. It is authored by Robert D. Behn, lecturer in public policy, and Elizabeth K. Keating, assistant professor of public policy.
“There is no one, uniform, nationwide, state fiscal crisis,” the authors conclude. “There are fifty different state fiscal crises — some small, some large, and each with its own unique characteristics.”
Although the specific characteristics vary between states, the paper identifies several common contributing factors that have seriously impacted state budgets in recent years. Those factors include:
Median per-capita state spending tripled from 1982 to 2002 while revenues have grown much slower. State revenues dropped 7.4 percent in the 2001 recession.
Escalating health care costs are taking their toll. Medicaid is now the second largest and fastest growing component of state budgets, accounting for 21 percent of state spending, having risen from 13 percent in 1990.
Education costs have continued to rise, and now account for 22 percent of total state spending.
Behn and Keating argue that the urgency of the state budget crises make it imperative that federal lawmakers begin addressing the issues soon.
“If Congress fails to revise in some fundamental way who should set policies for Medicaid and for long-term custodial care and who should pay for them, the fiscal crises of the states will inevitably continue to be a large problem,” the authors conclude.
The paper suggests several possible actions that the federal government could take to help the states deal with their ongoing financial problems. These actions include:
Permitting the states to tax Internet access.
Permitting the states to tax mail-order and Internet sales across state borders.
Providing more funding for such intergovernmental programs as the No Child Left Behind Act.
Revising Medicaid by splitting it into two programs — one that provides health care for the indigent (the original purpose of Medicaid), and a second that provides direct support for custodial, long-term care for the elderly and disabled.
The White Paper may be accessed online at
http://www.ksg.harvard.edu/taubmancenter/research/FacingTheFiscalCrises.pdf

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