Budget Cuts or Tax Increases at the State Level: Which is Preferable During an Economic Downturn?

Publication Date: January 2008

Publisher: Center on Budget and Policy Priorities (Washington, D.C.)

Author(s): Nicholas Johnson

Research Area: Economics; Government

Keywords: Economic projections; Recession; State budgets; Tax code

Type: Report

Abstract:

The combination of a weak economy and projected budget shortfalls will pose a major challenge for state policymakers: How can they balance their states’ budgets with the least possible harm to already damaged state economies? One answer is to draw down reserve funds, if possible. Another answer is to seek assistance from the federal government. Those options will help, but are unlikely to solve all of states’ problems. Some number of states will have to either (a) cut spending, (b) raise taxes, or (c) enact a combination of tax increases and spending cuts to keep budgets in balance. Policymakers sometimes contend that the weakness of the economy means that a state should rely solely on cutting spending, rather than raising taxes. The aversion to raising taxes during a recession, however, rests on a misconception of economic effects.