State and local governments may already be feeling the budgetary pinch due to the economic downturn, but the worst is yet to come, according to the Rockefeller Institute of Government.
"All the gloom and doom is prospective and it's coming fast," said Donald J. Boyd, a senior fellow at the institute, as part of a panel the organization hosted on the fiscal crisis and its nationwide impact yesterday.
"Not only have we begun to see consumption decline, but it's going to get much worse," he added.
Boyd noted that the looming recession will likely present challenges to state and local governments on a relatively widespread scale. While the country's most recent fiscal crisis at the beginning of the decade was relatively mild, the underlying economic situation this time is much bleaker, he said.
States that rely on income taxes as their main source of revenue, as well as states that rely on sales taxes, will facing declining revenues and tighter budgets in the coming months.
State and local governments can also expect their tax revenues to shrink in the coming months due to the fact that, as in the last recession, many high-income earners will see their wages shrink, relegating them to a lower tax bracket.
The institute, which specializes in studying state and local governments, also found that the economic decline has spread beyond states that were hit particularly hard by the housing crisis, such as Arizona and California.
Another point of concern for states, according to the institute, is that the last time the U.S. suffered a recession, state tax revenue dropped much more drastically than the real gross domestic product. While the GDP dropped roughly 4% from 2000 to 2002, real state tax revenues dropped nearly 20%.
However, despite the foreboding forecast, Henry W. Wulf, another senior fellow with the institute, is not sure state and local governments could have done much to avoid the ongoing decline.
"What would state and local governments have done differently if they had known five or 10 years ago, with absolute certainty, that this downturn was coming?" he said. "I'm not sure they would have done much differently."
