Adam B. Thimmesch
The U.S. federal structure tasks the states with providing many of the critical services on which individuals rely for their basic needs. State fiscal stability is therefore critical to state residents’ health, economic security, and physical safety, especially in times of macroeconomic hardship. It is unfortunate in this regard that prevailing economic conditions heavily impact states’ revenue streams and that periods of economic recession can be met with state spending that lags recovery. It is also unfortunate that states’ exposure to these downturns is partly attributable to their own policy choices.
Virtually all states have enacted balanced budget requirements of some form, with the result that states cannot easily smooth their spending with borrowing during economic downturns. Most states also rely to a large degree on the personal income tax, which is well known for its volatility. And states even increase the unpredictability of that stream of tax revenue by delegating tax-writing authority to Congress through the incorporation of the federal tax code (the “Tax Code”) into states’ own laws.