The Wall Street Journal's tax report points out that states are expecting slow revenue growth this year.
This is a particular worry for New York State, where tax revenues are disproportionately driven by Wall Street bonuses. I recently interviewed the business manager for an upstate school district as part of a story I was working on, and he's really worried about what's going to happen to the district's finances, which are heavily dependent on state aid. Eliot Spitzer had used some of the state's recent Wall Street windfall to try to put some stability into the level of state school aid, but with the subprime problems, he said he'd be thrilled if next year's aid doesn't fall.
This is part of a broader story about how volatile state earnings are becoming. New York State's finances are basically tied to the health of a single industry, while California's are hostage to the fortunes of two. Two of the three biggest states in the country are turning a slightly larger version of the Company Town.
One would argue for federalism, except that our federal tax receipts seem increasingly to be driven by the same few engines. Finance, entertainment, and technology throw off such massively disproportionate profits, and salaries, that problems in those sectors can easily engulf success in a hundred other less volatile industries.
Megan--
You forgot to throw in the obligatory note that capital gains and corporate taxes are much more volatile than the others, and thus this gives one more reason to rely less on them.
Comparative advantage?
And it's not like the third of those three largest states has a lovely, diversified economy. It just happens to be concentrated in a sector that's doing well right now. But I'm pretty sure Texas' state coffers from the mid-1980s would look similarly bleak.
"Finance, entertainment, and technology throw off such massively disproportionate profits, and salaries, that problems in those sectors can easily engulf success in a hundred other less volatile industries."
Is entertainment really that big? I think since people spend 4-6 hours a day listening to music or watching tv/movies we think (perhapse in the back of our minds) that entertainment is 20-30% of the economy. When you think about it how many nationally recognized actors, comedians, musicians, are there? 1,000?
Well the 4th biggest state had it all figured out. They had a diversified investment fund that the localities bought into and drew funds from to pay salaries, utilities and other costs.
Then it was decided that diversification was for suckers, and the big bucks was in securitized mortgages.
jmo,
Megan can correct me if I am wrong, but I am guessing she was talking about California specifically when she mentioned entertainment, not the entire country.
Two of the three biggest states in the country are turning a slightly larger version of the Company Town.
I'd say three of the four, even, because Florida has tried to make it work off of tourism and construction alone by dumping the tax burden on visitors and people stupid enough to buy housing there last. (see "Save Our Homes" and "portability").
It seems hard to discuss the woeful state of state finances without mentioning Medicaid and Medicare. The states would be doing better if they didn't ratchet up the spending during boom times -- just refund it to the taxpayers.
Not sure why your sources, at least from your posting, did not mention NYC and NYS's over-reliance on FIRE (Financial, Insurance and Real Estate) industries to drive its tax coffers. As a native NYker, born and bred in NYC, who I recently left it and the state I don't give a damn if NYC and NYS go straight to hell. And from my perspective they both of seem very inclined to oblige.