State and Municipal Alternatives to Austerity

The pitched battle in Wisconsin last winter over the collective bargaining rights of public sector workers was only the most dramatic expression of a struggle that is ongoing throughout the country over the future of state and local governments. For generations now, state and local governments have been the most important providers in the United States of education, health care, public safety, and other vital forms of social support. State and local governments are also, collectively, the largest employer in the country, responsible for creating thirty million jobs, either directly or through purchasing supplies or services from private businesses. This is 20 percent of the U.S. workforce. The stakes in this battle are obviously huge.

The budget crisis caused by the 2008–2009 Wall Street crash and the ensuing Great Recession is driving the dramatic transformation of state and local government policy. The recession blew a massive hole in state and municipal government finances. Tax receipts—particularly income and sales taxes—dropped severely along with household incomes, spending, and real estate values. Meanwhile, demand for public services, such as Medicaid and heating oil assistance, rose automatically as the recession created worsening circumstances for tens of millions of people.

Leaders of the hard Republican right have eagerly pounced on this Wall Street-induced crisis as a trigger for their agenda to radically downsize state and local governments by cutting taxes, slashing wages and benefits for public workers, and even selling off state-owned facilities, including state prisons. This movement, of course, includes Wisconsin Governor Scott Walker and his financial backers, the notorious billionaire brothers Charles and David Koch. But even preceding the Wisconsin battles, Republican luminaries Jeb Bush and Newt Gingrich had already begun to single out public school teachers, nurses, and other state and local government employees for attack, writing in the Los Angeles Times last January that “The lucrative pay and benefits packages that government employee unions have received from obliging politicians over the years are perhaps the most significant hurdles for many states trying to restore fiscal health.”¹

Still, the far right is not alone in advancing various sorts of austerity agendas for states and municipalities. Thus, Jerry Brown, the recently reinstalled (after a twenty-eight-year hiatus) Democratic governor of California is proposing to cut state spending by about $13 billion, or nearly 17 percent of the state’s current budget. ² Moreover, Brown’s proposal is widely perceived as representing the outer limits of a politically possible progressive agenda, even in Democratic Party-dominated California. What gives Brown’s proposal its progressive sheen is that he also supports tax increases to close the other half of an overall $26 billion budget deficit, as opposed to closing the full $26 billion gap through spending cuts.

The fiscal crisis facing states and municipalities is real. However, the dismal austerity options being advanced by Democrats and Republicans alike are by no means the only solutions. We propose here some alternative approaches that can accomplish three things: 1) Close the budget gaps in the short term; 2) Promote a sustainable recovery over the next few years; and 3) Over the long term, help insulate state and local government budgets from the effects of recessions. We develop these proposals after first taking a fuller measure of the causes and severity of the crisis.

How Severe Is the Crisis?

Due to the sharp falls in incomes, spending, and property values tied to the recession, tax revenues from the two main sources for state governments—income and sales taxes—declined precipitously, and even local property taxes, after expanding continuously for decades, went flat in 2010. By 2010, state tax revenues (adjusted for inflation and population growth) had fallen by fully 13 percent relative to where they were in 2007. By comparison, revenues fell only 7 percent following the 2001 recession. Even during the 1981–1982 recession, the most severe post-World War II downturn prior to 2008–2009, the decline in state tax revenues was less than 2 percent.³ State tax collections did start growing again in early 2010. But as of the most...