When the Great Recession hit, state tax revenues plummeted. Increased unemployment meant less income and sales tax revenue. Businesses saw lower profits, reducing the taxes they paid.
In the meantime, the demand for public services increased. With more people out of work, outlays from the unemployment insurance program grew significantly. With people falling into poverty and losing their health insurance, Medicaid expenditures increased.
This put Colorado in a difficult bind. Because the state is required to have a balanced budget, the government had to cut spending and turn to alternative revenue sources. With much of the big-ticket spending items mandated, cuts were especially concentrated on discretionary programs, such as higher education.
On the revenue side, some of the shortfall was filled by the Federal stimulus program (those dollars have run out). Some new revenue sources were implemented, such as taxes on vending machine purchases.
Colorado’s fiscal challenges are not unique. Indeed, impacts were much more significant in states such as California and Arizona.
Despite the end of the Great Recession and the bouncing back of revenues, many states still face daunting challenges. A report released just today by the State Budget Crisis Task Force outlines these challenges for 6 states. Although Colorado is not directly discussed in the report, it faces many of the same challenges. In particular, the report identifies:
- Medicaid Spending Growth Is Crowding Out Other Needs
- Federal Deficit Reduction Threatens State Economies and Budgets
- Underfunded Retirement Promises Create Risks for Future Budgets
- Narrow, Eroding Tax Bases and Volatile Tax Revenues Undermine State Finances
- Local Government Fiscal Stress Poses Challenges for States
- State Budget Laws and Practices Hinder Fiscal Stability and Mask Imbalances