Download A Fiscal Policy Agenda for Stronger State Economies

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Updated April 13, 2016
A Fiscal Policy Agenda for Stronger State Economies
By Erica Williams
With most state legislatures now in session, policymakers are making fiscal policy decisions that
will profoundly affect future economic opportunities in communities across the country. States face
a fundamental choice: they can provide the resources required for public investment in schools,
transportation, health care, safe communities, and other building blocks of economic growth, or go
down the path of tax cuts and skimping on public investment. When it comes to the former, states
have many tools at their disposal to promote economic opportunity.
After recession hit the states in 2008, record-breaking revenue declines brought deep, job-killing
cuts to schools, health care, and other key services1 that people depend on every day. State revenues
have since come back somewhat. While that growth has been slow and uneven, it enables states to
both make up lost ground and meet rising needs, including keeping up with growing enrollment in
K-12 schools and public colleges and universities — if they choose to.
This report provides a roadmap to fiscal policies that can help create jobs now and prime states
for long-term, broadly shared prosperity. Each section links to CBPP analyses describing the
options in more detail. The overarching message is that policymakers should:
 Target
public investments to boost the economy, now and in the future;
 Help
struggling families meet basic needs and participate more fully in the economy, by
reducing poverty, hardship, and income inequality;
 Avoid
ineffective strategies and gimmicks like costly tax cuts and artificial spending limits,
which can weaken a state’s economy;
 Improve
fiscal planning to protect services and investments that promote long-term economic
growth; and
Elizabeth McNichol, “Out of Balance,” Center on Budget and Policy Priorities, April 18, 2012,
http://www.cbpp.org/cms/?fa=view&id=3747. When states cut services, they end contracts with private-sector
businesses and reduce spending on private-sector goods, leading to layoffs or lower wages among private-sector
workers. These cuts can also mean layoffs for teachers, firefighters, police officers, and other public-sector workers;
states and localities have shed 308,000 jobs since December 2007. In turn, private- and public-sector workers facing
layoffs or pay cuts buy less, which reduces economic activity further.
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 Raise
revenues to make critical investments when necessary.
1. Make Targeted Public Investments
States can build a strong foundation for economic growth and promote jobs that enable people to
do more than just make ends meet. For example, public investment in education, transportation,
and fire protection — services that businesses rely on heavily — can create jobs in the short run and
improve economic growth and job quality in the long run.2
States’ resources are limited. As lawmakers grapple with difficult decisions about how much to
invest in schools and roads and whether to pursue new opportunities in areas such as early
education and job training, they should keep in mind that the benefits in many cases outweigh the
costs.
 Rebuild and strengthen
education. Most states provide less support per student for K-12
schools than before the recession hit, and nearly half of the states provide less support per
student for public colleges and universities. States should reinvest in education, sustaining
(and, where possible, expanding) these investments in the future economy. For example,
research shows that some types of education and training have high “bang for the buck.”
High-quality preschool improves not only children’s academic performance but also the
quality of a state’s workforce and jobs over time; the increased earnings alone outweigh the
costs by more than five times, one study found.3 Likewise, customized job training focused
on the basic skills sought by local employers has been shown to produce substantial payoffs.4
See: Years of Cuts Threaten to Put College Out of Reach for More Students
Most States Have Cut School Funding, and Some Continue Cutting
 Restore
infrastructure. Reversing the serious decline in state investment in transportation,
public buildings, water treatment, and other forms of vital infrastructure is key to creating jobs
and promoting full economic recovery — and this is an especially good time to do it, given
today’s low interest rates. The condition of roads, bridges, schools, and other physical assets
greatly influences the economy’s ability to function and grow. Commerce requires wellmaintained roads, railroads, airports, and ports so that manufacturers can obtain raw materials
Timothy Bartik, “State Economic Development Policies: What Works?,” presented at the 19th Annual State Fiscal
Policy Conference, Center on Budget and Policy Priorities, Washington, D.C., November 30, 2011,
http://research.upjohn.org/presentations/27/; Peter S. Fisher, “Corporate Taxes and State Economic Growth,” Iowa
Fiscal Partnership, revised February 2012, http://www.iowafiscal.org/2011docs/110209-IFP-corptaxes.pdf; Jeff
Thompson, “Prioritizing Approaches to Economic Development in New England: Skills, Infrastructure, and Tax
Incentives,” Political Economy Research Institute, U. of Mass., 2010,
http://www.peri.umass.edu/fileadmin/pdf/published_study/priorities_August9_PERI.pdf; and Robert G. Lynch,
“Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Development,” Economic
Policy Institute, 2004, http://epi.3cdn.net/f82246f98a3e3421fd_o4m6iiklp.pdf.
2
Timothy Bartik, “From Preschool to Prosperity: The Economic Payoff to Early Childhood Education,” W.E. Upjohn
Institute for Employment Research, 2014,
http://research.upjohn.org/cgi/viewcontent.cgi?article=1246&context=up_press.
3
Bartik, 2011, and Timothy Bartik, “Bringing Jobs to People: How Federal Policy Can Target Job Creation for
Economically Distressed Areas,” Brookings Institution, October 2010,
http://www.brookings.edu/~/media/Files/rc/papers/2010/10_job_creation_bartik/10_job_creation_bartik.pdf.
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and parts and deliver finished products to consumers. Growing communities rely on wellfunctioning water and sewer systems. Also, well-maintained schools free from crowding and
safety hazards improve educational opportunities for future workers.
See: It’s Time for States to Invest in Infrastructure
 Support
entrepreneurs. States should target their economic development resources where
most future jobs will come from. That means producing more home-grown entrepreneurs
and helping startups and young, fast-growing firms already located in the state to survive and
to grow ― not on cutting taxes and trying to lure businesses from other states. The vast
majority of jobs are created by businesses that start up or are already present in a state, our
analysis finds — not by out-of-state firms that relocate or branch into a state. Economic
development policies that ignore these realities are unlikely to succeed. Deep income tax cuts,
for example, fail to produce the promised economic benefits, and they take money away from
education and other public investments essential to producing the talented workforce and
quality of life that entrepreneurs require.
See: State Job Creation Strategies Often Off Base
careful spending decisions. States can free up funds for the above priorities by
reviewing other spending areas that may not be meeting intended goals. While the savings
from finding efficiencies are usually modest, some areas hold particular promise. A number
of states, for example, have implemented criminal justice reforms that save money without
compromising public safety. States can also better monitor and evaluate economic
development subsidies and eliminate those that are ineffective.
 Make
More broadly, states should scrutinize the billions of dollars they spend each year through the
tax code in the form of credits, deductions, and exemptions. For the most part, policymakers
don’t regularly examine these “tax expenditures” for effectiveness the way they examine yearly
budget appropriations. They also should evaluate their contracting practices, potentially
saving money by reducing reliance on consultants.
See: Improving Budget Analysis of State of State Criminal Justice Reforms
Promoting State Budget Accountability Through Tax Expenditure Reporting
A Balanced Approach to Closing State Deficits
2. Help Struggling Families Share in Prosperity
Unevenly shared prosperity that promotes the concentration of economic gains among the richest
households limits opportunity for the broad majority.5 Millions of families struggle to make ends
meet because their jobs pay too little or offer inadequate, unpredictable, and inflexible schedules.
Many others struggle because of employment barriers that are difficult or impossible to overcome,
like a disability or criminal record.
See Chad Stone et al., “A Guide to Statistics on Historical Trends in Income Inequality,” Center on Budget and Policy
Priorities, updated October 26, 2015, http://www.cbpp.org/research/poverty-and-inequality/a-guide-to-statistics-onhistorical-trends-in-income-inequality and Elizabeth McNichol et al., “Pulling Apart: A State-by-State Analysis of Income
Trends,” Center on Budget and Policy Priorities and Economic Policy Institute, November 15, 2012,
http://www.cbpp.org/research/poverty-and-inequality/pulling-apart-a-state-by-state-analysis-of-income-trends.
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This holds back state economies, now and in the future. Not only does it weaken the purchasing
power of poor and middle-class families, who spend all or most of what they earn, but extreme
income inequality left unaddressed and lack of economic mobility make economic growth less
sustainable.6 Limited opportunity affects children in particular. Children in poor families not only
perform less well in school than their better-off counterparts, but also likely earn less as adults.7
Forgone earnings and other side effects of child poverty create a substantial drag on the economy
over the long run.8
State policymakers should redouble efforts to help struggling families and avoid cutting supports
that ease hardship. They also should reform policies in areas such as immigration and criminal
justice that carry unnecessary economic costs, with the goal of helping more people participate more
fully in the economy.
 Boost
the earnings of working families. Twenty-six states and the District of Columbia
have enacted state-level Earned Income Tax Credits (EITC) to help working families earning
low wages meet basic needs. State EITCs build on the success of the federal EITC by
keeping working parents on the job and families and children out of poverty. This important
state support also extends the federal EITC’s well-documented, long-term positive effects on
children, boosting the nation’s future economic prospects. States can also help promote
family economic stability by raising their minimum wage. In fact, increases in state EITCs and
minimum wages work best together; it’s not an either-or choice.
See: States Can Adopt or Expand Earned Income Tax Credits to Build a Stronger Future Economy
How Much Would a State Earned Income Tax Credit Cost in Fiscal Year 2017?
State Earned Income Tax Credits and Minimum Wages Work Best Together
EITC and Child Tax Credit Promote Work, Reduce Poverty, and Support Children’s Development,
Research Finds
and better administer supports for the neediest, especially children. Families
turn to public assistance when they aren’t paid enough to get by, are unemployed, need to care
for a sick child, or face a crisis such as fleeing an abusive relationship. Many also face serious
mental or physical health problems. States should maintain cash assistance and other supports
like child care and transportation subsidies, funded by federal and state dollars, to help these
families meet basic needs and find and keep jobs. Also, ample opportunities exist to
strengthen other supports for low-income families that require little to no additional state
funding. For example, initiatives to boost participation in SNAP — a program that lifts 10
million people out of poverty — carry little state cost since SNAP benefits are fully federally
 Protect
See, for instance, Andrew G. Berg and Jonathan D. Ostry, “Equality and Efficiency,” Finance & Development, Vol. 48,
No. 3, September 2011, http://www.imf.org/external/pubs/ft/fandd/2011/09/pdf/berg.pdf and Jonathan D. Ostry,
Andrew Berg, and Charalambos G. Tsangarides, “Redistribution, Inequality, and Growth,” International Monetary
Fund, February 2014, http://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf.
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Greg J. Duncan and Katherine Magnuson, “The Long Reach of Early Childhood Poverty,” Pathways, Winter 2011,
http://www.stanford.edu/group/scspi/_media/pdf/pathways/winter_2011/PathwaysWinter11_Duncan.pdf. Job
losses during the recession exacerbated poverty and hardship for children, which means even greater future costs to
individuals, families, and state economies.
7
Harry Holzer et al., “The Economic Costs of Poverty in the United States: Subsequent Effects of Children Growing
Up Poor,” Center for American Progress, 2007, http://cdn.americanprogress.org/wpcontent/uploads/issues/2007/01/pdf/poverty_report.pdf.
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funded. School districts can provide free school meals to more low-income children through
the federal Community Eligibility Provision. State agencies can streamline access to these and
other key safety net supports like Medicaid so that children and families are connected to all of
the programs for which they’re eligible without duplicative application processes. And states
can adopt and enforce anti-discrimination laws to protect families with housing vouchers and
help them move to higher-opportunity neighborhoods.
See: State Temporary Assistance for Needy Families Programs Do Not Provide Adequate Safety Net for
Poor Families
Community Eligibility Adoption Rises for the 2015-2016 School Year, Increasing Access to School Meals
New State Option Can Cut Red Tape and Boost Medicaid Enrollment
Safety Net More Effective Against Poverty Than Previously Thought
Realizing the Housing Voucher Program’s Potential to Enable Families to Move to Better Neighborhoods
struggling residents — and the state — by expanding Medicaid. Health reform
gives states the option of extending Medicaid coverage to people with incomes up to 138
percent of the poverty line. This reduces the ranks of the uninsured, protects families against
health-related financial shocks, and keeps people healthier and able to work. It also brings
substantial federal funds to the state, since the federal government will pay the full cost of the
expansion through 2016 and nearly all costs after that. For states that have been using their
own funds to provide health coverage and services to people ineligible for Medicaid, this
option should be particularly attractive because it enables them to use federal money to help
cover existing costs, freeing up state funds for other priorities.
 Help
See: Medicaid Expansion Is Producing Large Gains in Health Coverage and Saving States Money
justice policies. State policy reforms can produce significant savings and
enable marginalized members of society to participate more fully in the economy. For
example, some states have chosen effective addiction treatment instead of incarceration for
people convicted of drug-related crimes. Others use sanctions rather than prison time for
people who violate the technical conditions of their parole, like missing a meeting with their
parole officer. These reforms have saved states millions of dollars without endangering public
safety. They also have reduced recidivism and given many people a better chance to become
productive members of society.
 Reform criminal
See: Improving Budget Analysis of State Criminal Justice Reforms: A Strategy for Better Outcomes and
Saving Money
 Bring unauthorized
immigrants into the mainstream economy. States can avoid the
unnecessary social, economic, and financial costs of detaining unauthorized immigrants by
leaving immigration enforcement to federal agencies. Instead, state policymakers can adopt
more inclusive approaches that bring unauthorized immigrants into the mainstream economy,
build a more educated and productive workforce, and allow immigrants to contribute to their
fullest. For example, states can strengthen enforcement of labor laws to ensure that all
workers, including unauthorized immigrants, receive the wages they are legally owed.
See: Inclusive State Policies Can Benefit Unauthorized Immigrants and State Economies
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3. Avoid Ineffective Strategies and Gimmicks
Several states have enacted or considered deep income tax cuts that give the largest benefits to
large, profitable corporations and the highest-income people. Others have weighed budget
restrictions that would severely limit state investments. Such proposals not only fail to produce the
promised economic benefits but also squander revenue that states could otherwise use to lay a
strong foundation for future economic growth by investing in high-quality schools, infrastructure,
and the like.9 They also make it harder for states to save for a rainy day or respond to changing
circumstances.
costly income tax cuts. Some policymakers have proposed extreme tax changes,
such as replacing the state’s income tax with a higher, broader sales tax. That would sharply
raise taxes for low- and middle-income households and threaten a state’s ability to maintain
many of the services necessary for a strong economy. Other proposals would eliminate or
deeply cut income taxes for individuals and businesses without replacing the lost revenues,
forcing drastic cuts in services like schools, transportation, and public safety.
 Avoid
Many states have enacted less extreme but still deep income tax cuts that benefit individuals at
the top and profitable businesses but do little or nothing for low- and middle-income
households and damage states’ ability to invest in more effective ways.
See: State Personal Income Tax Cuts: Still a Poor Strategy for Economic Growth
Lessons for Other States from Kansas’ Massive Tax Cuts
Fact Sheet: Tax Cuts Don’t Boost Small Business Employment
Fact Sheet: Why Cutting State Income Taxes Isn’t the Way to Attract Residents
Fact Sheet: Big Cuts in State Income Taxes Not Yielding Promised Benefits
Academic Research Lacks Consensus on the Impact of State Tax Cuts on Economic Growth
ALEC Tax and Budget Proposals Would Slash Public Services and Jeopardize Economic Growth
“FairTax” Proposals to Replace State Income and Business Taxes With Expanded Sales Tax Would
Create Serious Problems
costly corporate tax cuts. Large corporate tax breaks typically do little, if anything, to
spur economic growth. Most are a zero-sum game at best: if a state cuts a tax, it generally has
to make an offsetting cut to a program or service to keep its budget balanced; the spending
cut will likely reduce demand in the state just as much as the tax cut may have stimulated
demand. State film tax credits are one example. Film companies receive generous tax benefits
in many states for creating largely temporary and part-time jobs that they might have created
anyway, while people who rely on other forms of state spending take the hit.
 Avoid
See: Cutting State Corporate Income Taxes Is Unlikely to Create Many Jobs
The Zero-Sum Game: States Cannot Stimulate Their Economies by Cutting Taxes
State Film Subsidies: Not Much Bang For Too Many Bucks
Michael Mazerov, “Academic Research Lacks Consensus on the Impact of State Tax Cuts on Economic Growth,”
Center on Budget and Policy Priorities, June 17, 2013, http://www.cbpp.org/cms/index.cfm?fa=view&id=3975; Erica
Williams and Nicholas Johnson, “ALEC Tax and Budget Proposals Would Slash Public Services and Jeopardize
Economic Growth,” Center on Budget and Policy Priorities, February 12, 2013,
http://www.cbpp.org/cms/index.cfm?fa=view&id=3901; Peter Fisher, Greg Leroy, and Phillip Mattera, “Selling Snake
Oil to the States,” Good Jobs First and Iowa Policy Project, November 2012,
http://www.iowafiscal.org/2012docs/121128-snakeoiltothestates.pdf.
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artificial spending limits. Strict, arbitrary formulas to limit revenues and spending,
like Colorado’s “Taxpayer Bill of Rights” or TABOR, may sound appealing but are gimmicks
that hamstring a state’s ability to adapt to changing needs and voter demands. Since Colorado
adopted TABOR in 1992, every other state that has considered a TABOR has rejected it
because it requires massive reductions in support for vital services that residents want and
need, such as education, health care, public safety, transportation, and environmental
protection.
 Reject
See: Policy Basics: Taxpayer Bill of Rights (TABOR)
A Formula for Decline: Lessons from Colorado for States Considering TABOR
supermajority restrictions. Requiring a legislative supermajority or voter approval
for bills that raise revenue makes it harder for states to protect public investments during
recessions. The resulting cuts can cost jobs and weaken an economic recovery. These
restrictions typically reduce a state’s ability to repeal costly and wasteful tax loopholes, as well.
They can also damage a state’s bond rating and cause legislative gridlock: because a small
minority of lawmakers can block a tax measure, they can hold it hostage to enactment of
expensive pet projects, making it harder to enact policies that serve the state as a whole.
 Reject
See: Six Reasons Why Supermajority Requirements to Raise Taxes Are a Bad Idea
A “Super” Bad Idea: Requiring a Two-thirds Legislative Supermajority to Raise Taxes Protects Special
Interest Tax Breaks and Gives Budget Veto Power to a Small Minority of Legislators
4. Improve Fiscal Planning
The more accurate and useful information states have, the better decisions they can make about
allocating resources. Policymakers can better plan for the future by laying out a clear budget
roadmap, ensuring that budget impact analyses are professional and credible, and instituting
mechanisms that trigger needed mid-year changes when needed to keep the state on course. For an
overview see: Budgeting for the Future: Fiscal Planning Tools Can Show the Way.
 Create
better cost estimates. Policymakers need accurate information about the cost of
spending- and tax-related proposals to make informed decisions. Nearly all states produce
some sort of cost estimate of legislative proposals, typically called a “fiscal note,” but these
estimates often fail to extend beyond the next year or two, are not revised when the legislation
is amended, or are only produced for a narrow set of bills. This lack of information can cause
policymakers to enact proposals that cause serious fiscal problems.
See: Better Cost Estimates, Better Budgets: Improved Fiscal Notes Would Help States Make More Informed
Decisions
 Employ
best practices in budget planning. States routinely put at risk some of their
highest priorities ― educating children, maintaining a healthy and trained workforce, and
caring for the elderly, for example ― by failing to employ proven budget methods that would
help them plan further into the future. Getting a stronger grasp of likely revenues and the
cost of providing core services would help ensure that states have the resources to invest in
schools and other building blocks of strong economic growth and widespread
prosperity. Better planning also can help businesses by reducing their uncertainty about future
funding levels and tax rates.
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See: Better State Budget Planning Can Help Build Healthier Economies
“rainy day” funds. “Rainy day” reserve funds to help states offset revenue
declines during economic downturns are crucial to prudent fiscal management. In hard times,
policymakers can tap them to protect state investments that promote economic growth and
sustain the state’s demand for private-sector goods and labor. States without such funds
should create them; states with arbitrary or onerous restrictions on their use should reform
them.
 Strengthen
See: When and How States Should Strengthen Their Rainy Day Funds
“pay-as-you-go.” With an improving economy, many policymakers are tempted to
cut taxes in ways that will damage their state’s ability to maintain public investments over the
long term. States also may be tempted to enact new programs that are not sustainable without
significant new revenue. States can protect themselves against these possibilities by
adopting “pay-as-you-go” (PAYGO), a requirement that policymakers fully offset over a fiveyear period the cost of proposed and enacted spending increases or revenue reductions.
PAYGO helps policymakers and the public understand the consequences of budget decisions
and tax cuts so they can properly weigh the long-term impact of competing proposals.
 Institute
See: PAYGO: Improving State Budget Discipline While Retaining Flexibility
5. Raise Revenue Needed for Economy-Boosting Investments
Public discussions about strengthening the economy often center on tax cuts, despite growing
evidence that they don’t create many jobs or promote broad prosperity. Maintaining and improving
schools, transportation networks, and other public services shown to generate growth will require
resources, both now and in the future. States should pursue new revenue where necessary and
modernize their revenue systems for the long term.
focused tax increases. State revenues have finally returned to pre-recession levels
but remain inadequate in many states. Tax increases on high-income individuals and
profitable corporations (those best able to afford the higher tax and least likely to spend
substantially less as a result) typically are preferable to spending cuts. This is especially true
when the cuts in question could weaken the underpinnings of a sound economy — a highquality education system, access to college, and modern transportation networks, for example.
 Pursue
Policymakers can raise taxes on high-income households and profitable corporations by
changing the state income tax and reinstating taxes on inherited wealth. Evidence doesn’t
support the frequent claim that these kinds of tax increases will drive large numbers of
affluent people to other states.
See: Fact Sheet: Debunking the Myth that Raising Taxes on the Rich Will Harm a State’s Economy
Many States Tax Inherited Wealth
State Taxes Have a Negligible Impact on Americans’ Interstate Moves
Raising State Income Taxes on High-Income Taxpayers
tax collections. States can do a better job of collecting taxes due under current law
rather than reduce support for services. For example, the failure of catalogue or Internet
 Improve
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sellers to collect and remit state and local sales taxes costs states billions of dollars each year.
Similarly, many states don’t require online travel companies like Expedia, Orbitz, and Priceline
to collect and remit the appropriate tax on hotel room bookings. States also can nullify a
variety of tax-avoidance strategies employed by large multistate corporations by adopting
“combined reporting,” which treats a parent company and its subsidiaries as one entity for
state income tax purposes.
See: States Get New Tool to Collect Taxes Due on Internet Sales
State and Local Governments Should Close Online Hotel Tax Loophole and Collect Taxes Owed
A Majority of States Have Now Adopted a Key Corporate Tax Reform — “Combined Reporting”
New York’s “Amazon Law”: An Important Tool for Collecting Taxes Owed on Internet Purchases
state revenue systems. Antiquated tax systems ill-suited to the 21st century
economy hamper states’ ability to restore school funding, rebuild budget reserves, and invest
in the future. For instance, many states primarily levy sales taxes on tangible goods, even
though services — many of which didn’t exist when sales taxes were first enacted, such as
video streaming — make up a growing share of consumption. States can halt the erosion of
their sales taxes and improve their long-term ability to invest in state priorities by broadening
the sales tax to include more services.
 Modernize
See: Four Steps to Moving State Sales Taxes Into the 21st Century
States Should Embrace 21st Century Economy by Extending Sales Taxes to Digital Goods and Services
Expanding Sales Taxation of Services: Options and Issues
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