JPI Spring 2018

them. Figure 4 below shows that raising traditional sources of state tax revenue—such as personal
income tax, sales tax, and corporate income tax—was not common in the years preceding the
Recession. As Campbell and Sances point out, between only 10 and 20 percent of states raised these
taxes. 17 In contrast, the lower three panels of the graph show that between 20 and 50 percent of states
raised “other” taxes—a category they indicate includes alcohol, tobacco, and gasoline taxes—and
between 20 and 40 percent of state fees. States also clearly dipped into reserves, which 46 out of 50
states had at the start of the Recession. 18 About half of these states drew on those funds in the peak
year of the Recession.
The implication here is obvious. Although with the data presented one cannot assume that
policy makers abused their state budgets as a result of falling labor rates, it is clear that the discrepancy
was mishandled - the question is why. The traditional forms of revenue production mentioned—
raising income tax, sales tax, and corporate income tax—all have policy (and re-election) implications
for a state legislator or politician. Raising the tax on cigarettes and alcohol holds significance in a
different way than increasing the overall sales tax - raising income and corporate tax is a highly
politicized issue in every single election, regardless of political party or agenda. 2008 was a Presidential
and Senatorial election year. In 2006, two years before the Recession, Congressional seats were up for
re-election in every state. We do not need regression analysis to tell us why congressmen shied away
from increasing the appropriate tax measures to re-balance their state budgets a year or two before
they faced re-election. We see here though that, like Germany, both the conditions of political control
and budget and labor shortfalls were present in the years leading up to the crisis.
Many argue that de-regulation in 1982 was the seed of the financial crisis with the passing of
the Garn-St. Germain Depository Institutions Act. This removed restrictions on loan-to-value ratios
for banks, which lenders and others used to understand how risky a loan was. It is also utilized for
approving loans or requiring mortgage insurance. However, the early eighties brought a period of
economic “revolution” with President Reagan’s trickle-down policies. The economy appeared to be
improving by deregulation and the idea that allowing for more money at the upper echelons of the
economy would eventually have a rippling effect on the rest of the country. Many argue though that
this period facilitated imbalanced budgets, reckless lending, and overall structural weaknesses that led
to the collapse of the U.S. financial system almost 20 years later. 19
17
Andrea Louise Campbell and Michael W. Sances, “State Fiscal Policy during the Great Recession,” The ANNALS of the American Academy of
Political and Social Science vol. 650, no. 1 (2013): 252–273. doi:10.1177/0002716213500459.
18
Campbell and Sances.
19
Campbell and Sances.
JPI Fall 2017, pg. 34