State Financing

Report Outline
Federal Aid Losses
How State Budgets Work
Long-Range Outlook
Special Focus

Federal Aid Losses

Cloudy Fiscal Future for State, Local Units

There is a quiet revolution going on in the financing of American government. President Reagan's fiscal 1987 budget and the inevitability of cuts in federal spending programs have focused public attention on the deepening fiscal problems of the national government. But they also underscore an equally important development of the past few years—the growing budget clout of state and local governments. Facing a future in which they may get little or no financial help from Washington, state and local governments are preparing to go it alone. Increasingly, decisions about raising and spending money for the array of services most Americans expect from their government will be made at the state and local level.

“The wind is at their backs,” said John Shannon, executive director of the Advisory Commission on Intergovernmental Relations (ACIR), about the future prospects of state and local governments, State governments in particular have considerable momentum behind them. Faced first with the “tax revolt” of the late 1970s and then economic recession and federal funding cuts, states pulled themselves together and made the tough decisions about spending cuts and tax increases needed to bring their budgets into balance. Not every state is doing well these days; several oil-producing and agricultural states are struggling to make ends meet. Overall, however, the state and local sector is the picture of fiscal health compared with the federal government and its projected annual deficit of $200 billion or more.

It is not hard to find evidence of the strength of state treasuries. The New York Legislature in 1985 approved a three-year tax cut that should reduce personal income taxes some $1.7 billion a year by 1988. California officials, who had to struggle for several years to cope with fiscal problems resulting from Proposition 13, have watched with surprised delight as their new state lottery brings in a flood of money that could reach $3 billion a year.