US State Revenue Down a Third While Spending Increased

While US state governments continued spending at a voracious rate in 2009, recent US Census data that shows state tax revenue was plummeting, down almost a third.

The states were only able to finance their largesse via American Recovery and Reinvestment Act stimulus funds provided by the federal government. However, many of its provisions will expire this year… and the feds would have a tough time affording its marked level of support much longer anyway.

According to Reuters:

“Total state government revenue dropped 30.8 percent from 2008 to $1.1 trillion in 2009, the latest year for which data is available and the last year before the decennial census was completed.

“Much of the decline was caused by drops in social insurance trust revenue, which are funds providing money for programs such as unemployment compensation and public employees’ retirement, the Census said. Total taxes collected in 2009 fell 8.5 percent from the previous year to $715.1 billion. The Census said it was the first year-on-year decline in tax revenue since 2002.

“As revenues fell in 2009, states continued to spend. Billions of dollars from the federal stimulus plan passed early in the year buoyed budgets and prevented some cuts to education and public welfare programs. Within weeks of taking office in 2009, President Barack Obama worked with the U.S. Congress to pass an $814 billion economic stimulus plan of tax and spending measures that included the largest transfer of federal funds to states in U.S. history.”

Over the course of 2009, the states took in almost $480 billion in federal grant transfers, a massive subsidy that’s unsustainable in the long run. Further, as the article indicates, the stimulus was primarily used for welfare payments, especially unemployment, which has been an increasing rather than decreasing cost center. So, despite ongoing budgetary shortfalls, state expenses will keep rising.

Looking ahead, the unemployment picture is not likely to improve a bit, and states, already short on revenue, have only a much poorer Uncle Sam to count on during these lean times. With no other easy or politically palatable options on the table, Bernanke and the Fed are likely to continue burning the midnight oil and working the presses. You can read more details in coverage from Reuters on how US state revenue fell in 2009 while spending didn’t.


Rocky Vega,
The Daily Reckoning