Tax Structure and Revenue Instability: The Great Recession and the States

  • Authors: Howard Chernick, Cordelia Reimers, Jennifer Tennant
  • Date: March 3, 2013
Though the great recession has had the most severe overall effect on state tax revenues of any downturn since the Great Depression, impacts varied widely across states. Tax revenues were affected through two different channels. The first is due to the collapse in realized capital gains income following the sharp decline in the stock market. State tax bases are affected in proportion to pre-recession reliance on capital gains income, in turn closely associated with the degree of income concentration. Largely due to capital gains income, the income of high-income taxpayers is more cyclically sensitive than that of lower-income taxpayers. The second channel, the differential effect on state output and employment, has its greatest impact on incomes below the top 5 percent of the distribution. We hypothesize that variation in revenue impact across states is due to differences in the severity of the income shocks at different levels of income, the degree of income inequality, the importance of capital gains in top incomes, and the level and progressivity of tax burdens. Progressive states are likely to be more vulnerable to revenue losses in economic downturns. Progressivity and income volatility may interact to amplify the recession’s fiscal impact.
 

State-Local Pension Costs: Pre-Crisis, Post-Crisis, and Post-Reform

  • Authors: Alicia H. Munnell, Jean-Pierre Aubry, Anek Belbase, Joshua Hurwitz
  • Date: February 2, 2013
State and local governments have been facing an extraordinarily difficult fiscal environment in recent years. One of many challenges has been restoring public pension plans to a sound fiscal footing after the economic crisis of 2007-09. States have begun to respond by enacting a mix of revenue increases and benefit cuts. These changes will, over time, improve the financial outlook for plans and help ease their impact on other budget priorities. This study analyzes the nature and magnitude of these effects by analyzing pension costs before the financial crisis, after the financial crisis, and after reforms for a sample of 32 plans in 15 states. The results show that most of the sample plans responded with significant pension reforms, generally increasing employee contributions and lowering benefits for new employees; the changes were largest for plans with serious underfunding and those with generous benefits; in most cases, reforms fully offset or more than offset the impact of the financial crisis on the sponsors’ annual required contribution; and employer contributions to accruing benefits for new employees were cut in half, sharply lowering compensation for future workers. In short, states have made more changes than commonly thought. Whether these changes stick or not is an open question.
 

Public Attitudes About Macroeconomic Policy in the U.S.

  • Authors: Steven M. Fazzari, Stanley Feldman, Cindy D. Kam, and Steven S. Smith
  • Date: April 4, 2013
Since at least the Great Depression, most economists and most Americans appear to have accepted that the government should play a significant role in managing the economy by adopting policies that stabilize employment, encourage economic growth, and control inflation. Nevertheless, Americans have always differed on the proper form and extent of government intervention, and these differences may have sharpened in recent decades. In general, policy attitudes appear to have sorted into liberal and conservative clusters and aligned more fully with partisan preferences (Abramowitz 2010). The Great Recession occurred in this context of party polarization and probably contributed to a continuation of change in party control of the institutions of government.