States of Austerity

“It’s all in the role of the dice. And it’s really tough for the states to control; states with volatile sources of income witnessed a revenue shock”, Kim Rueben of the Urban Institute told the HPR, regarding the recent recession’s impact. “It’s really been a question of who has done the least harm,” she added.
Indeed, the Great Recession hit state pocketbooks hard. State deficits reached $191 billion in 2010, compared with just $80 billion at the height of the last recession during the early 2000s.  Compounding this crisis, states will receive 2.7 percent less funding from the federal government this current fiscal year than last with the budget deal passed last August.
While revenues have slowly increased over the past year with the recovery, states continue to seek innovative ways to balance their budgets without compromising critical programs such as K-12 education and health care. Yet, the Center on Budget and Policy Priorities reported that 37 states are providing less funding per student this year, with 17 slashing K-12 education budgets by more than 10 percent. 31 states have cut public health care programs, and all but six have cut state workforces.
Though austerity is reigning across the country, state legislators and think tanks are finding creative alternatives to raising taxes and cutting expenditures. While such solutions certainly are not panaceas, they represent real attempts at preserving existing public programs at low costs.
Money Does Not Always Equal Quality
Consider education, which has recently been targeted for significant cuts. Arizona is ranked second to last in state per-pupil spending, but schools like Mesquite Elementary School have received “excellent” ratings over the past eight years based on standardized test scores, the highest under Arizona’s evaluation system. Their secret is budget creativity and personalized, individual attention for each student.
According to Edutopia, a non-profit organization that promotes innovation in education, Mesquite faced a 75 percent capital budget cut in 2010. Teachers and administrators experimented with unorthodox methods of maximizing resources: for instance, paper use has been replaced with digital means of communication, and teacher collaboration websites containing lesson plans and activities have eliminated the need for textbooks since 2007. Furthermore, teachers have fine tuned education to each student’s needs, providing struggling students with additional aid and successful students with more challenging material. The result has been marked improvement in test scores, proving that cash-strapped school districts can still provide a quality education.
A Quarter Here, a Dollar There
The shrinking tax base has challenged state legislators, but one income source with positive externalities that states have been experimenting with is tolling. According to the National Council of State Legislators, “most states have enacted toll authorizing legislation, and tolling is a growing source of revenue in more than 30 states”.
Of these, ten states have also introduced “high occupancy toll” (HOT) lanes, which allow drivers that do not meet carpool lane requirements to pay for access. Beyond the revenue component, tolls have other good effects, reducing congestion, fuel consumption, and traveling time. While tolls alone will not eliminate budget gaps, they exemplify the type of thinking policymakers should pursue.
Enter the Federal Government
Considering these pressing challenges, what can Washington do? Congress can pass one measure that would provide approximately $23 billion in additional revenue to states. The law, entitled “The Marketplace Fairness Act”, would not cost the federal government a dime. Instead it allows states to enforce sales tax laws currently being circumvented. A 1967 Supreme Court ruling asserted that states could not tax firms lacking a physical presence within their borders, even if the firm’s customers resided in the state. The decision was grounded on the premise that such taxes would infringe upon the commerce clause of the U.S. Constitution, which limits interstate commerce regulatory powers to the federal government.
Introduced last November by conservative Senators Mike Enzi (R-Wyo.) and Lamar Alexander (R-Tenn.), the bill received bipartisan support in the Senate. Though this legislation would have major ramifications for online commerce, for the sake of fiscal responsibility, this law merits widespread support.
Do the States Really Have the Power?
There are external factors unique to specific states that affect prospects for sustainable budgets. As Dr. Therese McGuire of the Kellogg School of Management at Northwestern University told the HPR, “Nebraska and Massachusetts, for example, have diversified economies, which have lessened the effects of the Great Recession on their budgets.” In contrast, she pointed out that severe fiscal conditions in Nevada and California can be linked to their less diversified economies and exposure to the housing bubble. Beyond that, other economists argue that large natural resource reserves in states like oil-rich North Dakota explain why some states maintained balanced budgets.
Regardless, deliberate governmental action can address budgetary challenges, but it requires political compromise. McGuire remarked that, “the political process makes budget decisions difficult.” She continued, “Those states that have manageable deficit situations have politicians willing to work across the aisle and make tough choices”.
To illustrate this point, consider Illinois and Indiana, two geographically and economically similar states with very different budget situations. Indiana has experienced mild deficits with a government inclined to compromise, while Illinois faces immense shortfalls and maintains a fractured political system. Indeed, states that have done well recently are often those that mitigated partisan agendas. Compromise, while difficult for politicians to swallow, is a requisite for fiscal responsibility.
What’s the Secret?
Unfortunately, no single solution exists for maintaining a balanced budget. Nevertheless, seemingly trivial efforts like those from Mesquite Elementary School can accomplish much in the aggregate. When further spending cuts and revenue increases are impossible, states must resort to these unconventional methods, and when pursued with bipartisan cooperation, they can sizably reduce deficits.  Rather than debating whether to raise taxes or cut spending, state legislators facing billion dollar shortfalls should think outside the box and consider trying something new.