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State Government Revenue Declined Sharply While Expenditures Rose in FY09

January 11, 2011

The economic recession that began in December of 2007 and lasted until June 2009 caused state government revenue to fall dramatically in nearly all states, according to the report "State Government Finances: Summary 2009" released in January 2011 by the U.S. Census Bureau.  The report, based on data collected by the Bureau's "Annual Survey of State Government Finances," found that total state tax revenue, which accounts for nearly half of total state government general revenue, fell 8.5 percent, from roughly $776 billion in FY08 to $715 billion in FY09. Personal and corporate income taxes fell 13 percent, the first decline in this revenue in five years. Funds from sales taxes declined 2.5 percent, while fuel sales taxes dropped 3 percent. Funds from taxes on sales of tobacco products, however, rose nearly 4 percent.

From FY08 to FY09, total state government revenue from all sources fell 1.4 percent. In contrast, total state general expenditures rose 3 percent, to roughly $1.5 trillion. One of the largest increases in state spending occurred in unemployment benefits. Total state spending on unemployment compensation jumped 86 percent, from $35 billion to $66 billion. In FY09, total spending on unemployment insurance claims exceeded revenue by 57 percent.  Public welfare expenditure rose 6.1 percent in 2009 to $437 billion.

Effects of Federal Stimulus Aid

State revenue shortfalls were partially mitigated by increases in federal aid, particularly grants received under the Ameri­can Recovery and Reinvestment Act (ARRA). Federal ARRA funds began to be distributed to the states in the second calendar quarter of 2009. However, they had a noticeable effect on state revenue during the full fiscal year. Total federal grants to states grew nearly 13 percent from FY08 to FY09. Total federal grants to states accounted for 32 percent of total state government general revenue in 2009, versus 28 percent in 2008. Education at all levels was a large beneficiary of the added federal funds. Federal education grants to states increased 10 percent-totaling $82 billion in FY09, compared with $74 billion a year earlier. In contrast, federal grants to state governments for health and hospital-related activities rose only 4 percent. Stimulus funds are expected to wind down during FY11, however.

Increasing Long-term Debt

In addition to receiving greater amounts of federal aid, many state governments also made up for the gaps between revenues and expenditures by increasing their long-term debt. Total state government long-term debt at the end of FY09 totaled $1.04 trillion, up 4.7 percent from FY08. State government debt for general purposes grew to $643 billion, an increase of 5.3 percent, while government debt for private purposes increased 4 percent. At the same time, state governments were taking advantage of record-low interest rates by repaying previously issued debt. In FY09, the amount of debt retired by states rose nearly 17 percent, to $109 billion..

Copies of the Census Bureau's report may be downloaded for no charge.


Ken Redd
Director, Research and Policy Analysis