Commentary | Budget Taxes and Public Investment

California’s Day of Action highlights need for fiscal relief to state and local governments

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Students, parents, teachers, and other concerned citizens throughout California turned out en masse on March 3 to protest teacher layoffs and other cutbacks, combined with sharp tuition increases for public universities. Similar cutbacks are being proposed and adopted around the country as state and local governments struggle to balance their budgets amid shrinking tax revenues.

While some of these budget actions – such as a planned 32% tuition hike at California state universities – are seriously straining the education system, they also have a much broader impact, threatening to stall a fragile economic recovery and eliminate millions of jobs around the country, in both the public and the private sector.

Yet state governments cannot on their own put a stop to the cuts. In his November 2009 Briefing Paper States in Stress, EPI Policy Analyst Ethan Pollack stressed that because states are unable to run budget deficits, even during severe economic downturns, they are in urgent need of fiscal relief from the federal government. EPI’s American Jobs Plan is recommending $150 billion of aid to state and local governments, which it says will create more than 1 million jobs.

Late last year, EPI’s research showed that the $52.2 billion of the $144 billion in budget relief to states made under last year’s Recovery Act had provided a significant boost to the economy and created or saved between 360,000 and 500,000 jobs. But because of the long and deep jobs crisis, most state governments continue to face deep shortfalls.

A common misconception in the debate over what to do about state budget deficits is that only state workers are affected by these shortfalls. In his paper, Pollack shows that state and local budget crises threaten jobs in both the public and the private sector. This is because budget cuts reduce transfer payments such as unemployment insurance or food stamps to individuals, cut funds to private contractors, shrink demand for equipment and supplies, and dampen consumer spending—all of which results in private-sector job loss.

This extremely fragile condition of state governments from San Francisco to Trenton, New Jersey was the subject of a panel discussion that EPI hosted last November on Spurring Job Creation: The Role of Federal Aid to State and Local Governments. One of the panelists was Mark Zandi, the chief economist for Moodys.com, who warned that the economic recovery remained precarious, particularly for state and local governments that faced a total $150 billion fiscal shortfall in 2011.

Another panelist at that event responded to those critics who insist that—in the midst of the worst economic downturn since the Great Depression—these states balance their budgets without any fiscal relief.

“Who is willing to have their public school closed?” asked Iris Lav, a senior advisor at the Center on Budget and Policy Priorities. Judging from the turnout at California’s recent Day of Action, there is scant support for that sort of draconian budget cut.

See more work by Andrea Orr