The Fiscal Crisis in State Government – And What Should be Done About It

While the federal deficit captures the news headlines, there is a deep and pervasive fiscal crisis in state finance. This crisis is largely a result of the Great Recession, which has caused the steepest decline in state tax receipts on record. It is also a structural issue, resulting from unfunded retirement plans that are beginning to come due. With state spending accounting for one eighth of US GDP, this crisis has serious implications for economic recovery, for jobs and for the credit markets, where states and municipalities have borrowed nearly $3 trillion. This paper reviews the origins and the scale of the state fiscal crisis. It considers its impact on economic growth and fiscal stability. And it lays out some recommended policy actions that are needed in order to address these issues and help put state finances on a sounder, more sustainable footing.