Gov. Mitch Daniels: States must tighten their belts even more

Indiana Gov. Mitch Daniels, who ran the US government’s budget office for George W. Bush, expects that the 50 states will need to permanently tighten their belts and do less for their citizens.

Because of the economic contraction, the Republican governor foresees “a long-term contraction in the scope of what states are doing,” he said at a Monitor-sponsored breakfast for reporters on Tuesday.

New report on state revenues

The recession without doubt has left states in financial trouble, as tax collections have fallen. (The Monitor writes about states facing the severest problems here.) State tax revenues declined 4.1 percent nationwide during the final three months of 2009, according to a new report by the Rockefeller Institute of Government.

Five straight quarters of year-over-year decline set a record, the Institute said, with both income-tax and sales-tax revenue falling during the entire five-quarter period.

When a recovery comes, Governor Daniels says, “states cannot expect the sort of rapid snap back in revenues that had been the case in the past.” The reason, he argues, is that in the past Americans “spent more than they took in. They borrowed on their credit card, against the paper value of their house – things they won’t be able to do or won’t do going forward.” As a result, he says, “consumption is going to be at permanently lower levels.”

States to feel consumers' caution

Greater consumer caution on spending will mean less tax revenue for states. “States get most of their most of their money, the largest piece I should say, from sales taxes,” Daniels says.

As a result, the expected economic recovery will not solve states’ budgetary woes. “Yes, revenues will start to rise again, let's hope, but they will not get back on the trend line as they had in previous recessions,” he says.

“For states," Daniels wrote in a recent op-ed for The Wall Street Journal, “the real world is about to arrive.”