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Will balanced budget requirements result in state innovation cuts?

November 29, 2018

Strict balanced budget requirements, tax or expenditure limits and party control of a state legislature and governorship can influence innovation funding when states respond to deficits. As states face new political landscapes and decision makers in their legislatures, the implications of a recent study on the topic emphasize the importance of keeping innovation on a state’s agenda.

The analysis by the Tax Policy Center (TPC), Budget Processes and the Great Recession – How State Fiscal Institutions Shape Tax and Spending Decisions, explores how strict balanced budget requirements (BBRs) and tax or expenditure limits (TELs) influence states and their decisions to either cut spending or raise revenues in response to surprise deficits and finds that budget processes and party control influence a state's response.

When studying the effect of budget processes in the period during and following the Great Recession, the authors found that states with strong balanced budget requirements, binding revenue limits, or a combination of strict revenue and expenditure limits bridged the largest share of their deficit gaps (compared with states that had weaker rules). Both before (1990-2007) and following the onset of the Great Recession (2008-2015), strong-balanced budget requirement states made up most of their gaps via budget cuts. Strict revenue-limited states also relied more on budget cuts during both periods, while expenditure-limited states relied more on revenue increases.

States bridged less of their deficit gaps in the periods during and following the Great Recession than in the period before the Great Recession. In general, between 1990 and 2007, states closed about 60 percent of an unexpected deficit usually through an even combination of tax increases and budget cuts. However, during and in the aftermath of the Great Recession, states only closed 40 percent of an unexpected deficit, and they did so by relying more heavily on budget cuts.

This analysis of budget policy aligns with the difficult experience of many state-level innovation initiatives over the last decade. For example, programs such as the Missouri Technology Corporation (MTC) and the Texas Governor's University Research Initiative (GURI) have seen major funding cuts — or outright elimination like the Kansas Bioscience Authority (KBA) — since 2008. Similarly, NSF data shows that state and local spending for university R&D decreased in 25 states from 2011-2015. While small comfort for eliminating programs, the study suggests that, at least some state cuts to science and innovation funding may have been more as a result of a restrictive budget process than ideological hostility toward the programs. 

The TPC’s finding that budget-focused deficit solutions rose after the Great Recession seemingly corresponds with the rise of unified Republican control among state governments, and the study also seeks to understand whether party control of a state legislature and governorship also affected state responses.

Between 1990 and 2015, the report notes that Republican-controlled governments closed less of their deficit gaps than Democratic-controlled or divided governments, and relied more on budget cuts than on revenue increases to do so. As unified Republican control became more common during and following the Great Recession, the authors found that differences in states’ responses pre– and post–Great Recession largely track along the differences among divided, Democratic-, and Republican-controlled governments.

The authors suggest that these party-based differences in approaching deficits may mean that the higher rate of addressing shortfalls before 2007 than after could have been driven at least as much by changes in party control as by any inherent fiscal situations following the Great Recession. However, many state budgets are only recently recovering — NASBO reports 2018 state revenues are at their strongest since 2011 and spending is growing but still below long-term averages. These next few budget cycles may, therefore, provide a better opportunity to see whether party control seems as important to closing budget gaps during a stronger economy.

Entering the 2018 midterms, Republicans had a +14 state trifecta advantage — where one party holds the governorship and majorities in both Senate and House. Of the 34 states with trifectas pre-election, 26 were Republican and eight were Democratic. After the 2018 midterms, Republican trifectas declined to 21, while Democratic trifectas increased to 13, and 15 states with divided governments fell to 13, with Connecticut picking up a Democratic trifecta (retaining the governorship and state Senate) and Alaska picking up a Republican trifecta (winning both the governorship and the House).

TPC’s analysis is a reminder that legislative budget decisions do not happen in a vacuum — project revenues, budget statutes and political environment also weigh heavily in final decisions. Proponents of funding science and innovation, therefore, not only need to argue that these investments are important, but further, that these investments deserve being a priority.

state budgets, policy, innovation