Spending on Social Welfare Programs in Rich and Poor States. Final Report.. 1. The State Fiscal Crisis and Low Fiscal Capacity States


At the time of our site visits, all six states were experiencing difficult fiscal problems. Yet these problems varied between rich and poor states as well as among these six states. The crisis was driven largely by a sharp drop in revenues in 2001 and 2002 (Boyd 2003). The declines were greatest among the comparatively wealthy states in the Northeast and Far West. They were less severe in the Middle Atlantic and Rocky Mountain states, while the declines were smallest among states in the Great Lakes area, the South, and the Plains states.

One behind this geographical variation was the source of states' tax revenues. Because the greatest decline in revenues occurred in individual and corporate income taxes, states that relied heavily on consumption taxes saw no extreme declines in revenues. In general, the poor states in our sample relied more heavily on sales taxes. For example, in FY 2003, Arizona, Mississippi, and New Mexico each received about half of their tax revenues from sales taxes. Of these six states, only West Virginia, which received 34 percent of its tax revenues from this source, relied less on sales taxes than the median state (which received 37 percent of its tax revenues from consumption). In addition, smaller revenue declines occurred in states without many wealthy residents, since much of the revenue decline stemmed from losses in income from capital gains after the stock market bubble of the 1990s burst in late 2001. Because these low fiscal capacity states did not reap large revenue gains from the bubble, they did not greatly suffer from its abrupt termination.

Exhibit IV-3 shows changes in tax revenues in these six poor states, and for all states, for the years 1998 to 2003, standardized to equal 100 during the revenue peak of 2001. Though four of the states experienced declines in tax revenues after 2001, two states continued to see growth. Thus, except for the two western states, which tracked national averages closely, the poor states, when compared to the rest of the country, saw smaller increases in revenues in the late 1990s as well as smaller declines after 2001.

  1998 1999 2000 2001 2002 2002
Exhibit IV-3.
Changes in State Tax Revenues, 1998-2003,
Standardized such that Revenues in SFY 2001 = 100
Arizona 80 91 97 100 94 96
New Mexico 77 82 87 100 99 97
South Carolina 87 96 98 100 97 98
Louisiana 88 88 91 100 101 98
Mississippi 86 93 97 100 102 105
West Virginia 92 96 97 100 104 107
All States 83 87 96 100 95 96

Some short-run factors alleviated state revenue problems in poor as well as wealthy states. Two of the most important were money from the tobacco settlement and state fiscal relief from the federal government in 2003. Nonetheless, social welfare programs in low fiscal capacity states were hit hard in other ways, largely as a result of increasing needs. Food Stamp recipients-one measure of need roughly comparable across states-grew an average of 38.5 percent among the six poor states between FYs 2000 and 2003, while the average growth among all states was 24.9 percent. Low fiscal capacity states also saw no significant decline in TANF caseloads between 2000 and 2003, while higher fiscal capacity states did (Gais, Burke, & Corso, 2003).

Unemployment rates among the six poor states generally did not rise faster than the rates in the U.S. as a whole, but their rates were already higher than the U.S. average, as Exhibit IV-4 demonstrates. Unemployment levels rose in most of the six states between 1999 and 2002. South Carolina, Louisiana, and Mississippi saw the largest increases. The southern states also experienced relatively early increases in unemployment: Mississippi and Louisiana's unemployment rates began to rise in 2000 and South Carolina's as early as 1999.

Exhibit IV-4.
Unemployment Rates in the Six Poor States and in the U.S. as a Whole, 1995-2003

Unemployment Rates in the Six Poor States and in the U.S. as a Whole, 1995-2003

Other factors compounded the short-run fiscal problems in these states while alleviating them in others. For example, although West Virginia experienced no decline in revenues, neither had it participated in the boom of the 1990s. It, thus, had few reserves to draw on in managing its fiscal crisis. In fact, West Virginia's fiscal problems were compounded by unfunded liabilities in the state's workers' compensation and retirement programs-spending that was enforced by the courts. South Carolina also saw slow growth in revenues for some years, compounded by its large increases in unemployment; indeed, budget shortfalls and cuts have plagued the state since 2000.

New Mexico was exceptional in suffering little from the recession. The state was able to rely on revenues from minerals, oil, and gas as well as many services. Because it had tried to keep 5 percent of recurring appropriations in reserves, the general fund entered the recession with an operating reserve and had no deficit, even in fiscal year (SFY) 2004.

Despite this variation, these six states have generally faced substantial increases in needs since the beginning of the decade, while their tax revenues grew slowly or even declined. All of the states were, thus, under some fiscal pressure, and how they handled that pressure revealed much about influences on state choices in social welfare programs.

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