More evidence of the grim situation faced by state budget-makers was recently provided in a report issued by the Rockefeller Institute. Examining changes in state revenues across the fifty states, the report finds that states are in a worse predicament than they were one year ago, and goes on to predict that the economic slowdown will make the situation even worse.

Taking account of changes in state tax laws as well as inflation in the cost of providing government services, the report finds that state revenues decreased by 4.3% relative to where they were in that same quarter last year. Recognizing that budget shortfalls were imminent, state governments did slightly increase their tax collections during the past year, but by nowhere near the amount needed. Notably, tax hikes in some areas were partially offset by a 16% decline in corporate tax collections.

The report also notes that the Bureau of Economic Analysis estimates inflation in the costs faced by state and local government to have been about 6.2% in 2007, a rate significantly higher than the inflation rate throughout the rest of the economy. One of the most obvious lessons to be drawn from this is that tax caps tied to the rate of inflation make no sense, since the cost of programs that taxes pay for increase faster than inflation. If state and local revenues are to have any hope of keeping up with the rising cost of the services they are meant to fund, lawmakers will have to move away from cutting taxes, and start making hard decisions about how they're going to pay for the services their citizens need.

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