Recession, Recovery, and State and Local Finances

The Great Recession hit state and local finances much harder than any recession of the past 50 years. While it is well-known that the recession was deeper and longer than other recessions, what is less well understood is that the factors driving state tax revenue were hit far harder than underlying economic variables might suggest, and far harder than in past recessions. As of June 2011, state tax revenue has begun growing again but the state and local finances are far from recovery: state tax revenue remains well below pre-recession levels, states are struggling with the loss of federal stimulus money, Medicaid spending pressures are rising, pension contributions and retiree health care payments are rising, and local governments in many states face severe fiscal pressure from weakening property tax revenue. The state revenue crisis is over but the fiscal crisis continues.