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The Atlanta Fed's SouthPoint offers commentary and observations on various aspects of the region's economy.

The blog's authors include staff from the Atlanta Fed's Regional Economic Information Network and Public Affairs Department.

Postings are weekly.



Unemployment insurance issues

Back in December, SouthPoint highlighted the issues Southeastern states were facing with their unemployment insurance funds. In our ongoing contacts with business owners and managers, we continue to hear about this pressure at a particularly bad time. Generally weak demand and low revenues have already depleted the cash positions of many businesses, especially small ones. Now, as a majority of states have drained their own unemployment insurance reserves, forcing them to borrow from the federal government, some states are increasing unemployment taxes to help replenish the funds:


Not surprisingly, anecdotal feedback we have received indicates that the timing couldn’t be worse. While any additional monetary outflows are of concern for businesses focused on surviving the current situation, for those with larger numbers of employees, dealing with the increased taxes has the potential to be devastating. Of course, some businesses that were considering staff increases are now going back and “doing the math” to determine if the additions are affordable given the new circumstances.

We have also noted that state lawmakers might be viewing the unemployment insurance tax increase as a problem for potential job-creating companies. In Florida, this issue is getting an increasing level of attention from both politicians and the media.

The good news (if you care to characterize it as good) is that some states are even worse off than those in the Southeast: California, Michigan, and New York, among others, have debt from the Federal Unemployment Account that is even higher than that of the worst Sixth District state. And employers in Hawaii may see an increase of more than 1,000 percent on the 2010 average unemployment tax per worker. Regardless of location, though, eventually businesses (and those they pass their costs on to) will have to pay for the significant insurance expenditures being made as a result of the large number of unemployed.

By Chris Oakley, vice president and regional executive of the Jacksonville Branch of the Federal Reserve Bank of Atlanta

February 17, 2010 in Employment, Taxes | Permalink


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State revenues and recessions, part two

Last week we noted that this recession has hit state government finances hard. Declines in revenue have been deep, and Southeastern states are no exception. The reason is rather straightforward—the economic downturn was deep in the region, and the falloff in economic activity led to unprecedented declines in state revenues. States in the region responded by reducing spending, cutting services, and reducing employment. Direct federal assistance to state governments through the American Recovery and Reinvestment Act (ARRA) has helped mitigate revenue shortfalls, but pressure on budgets remains significant. How long this pressure remains is an important component of the outlook for 2010 and beyond.

Gauging the downturn and its impact on state finances
Since state level GDP data are only available on an annual basis, we look to higher-frequency series to more closely track economic activity. The Federal Reserve Bank of Philadelphia produces a monthly coincident index for each of the 50 states. The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP) so long-term growth in the state’s index matches long-term growth in its GDP.

Chart 1 shows the year-over-year percent change in the weighted average coincident indicator for the six states in the Sixth Federal Reserve District (Alabama, Florida, Georgia, Louisiana, Mississippi, and Tennessee) and total tax revenues for these states. The current downturn represents the deepest decline for both measures, and it also reveals how the two are related as the decline in economic activity hits revenue resources—especially sales tax intake—quite hard during recessions.


The current decline in Southeastern states' revenues is also deeper than in previous downturns. Chart 2 takes the data used in Chart 1 for total state tax revenues back to the early 1970s. In April 2009, the year-over-year measure reached –13.7 percent before improving to –10.2 percent by September. Before the current year, the deepest decline in total state tax revenues for the region was –3.5 percent, reached in March 2002.


The impact on state budgets
State spending is generally procyclical. When economic activity is positive and tax revenues are strong, states tend to spend more on services and programs like education and transportation. During economic downturns, states tend to spend more on social welfare programs. However, this spending is constrained by limited revenues. State budget shortfalls have been significant in the region. The table below estimates these shortfalls for the current fiscal year.


States have responded by cutting spending and services. According to The Center on Budget and Policy Priorities (CBPP), four Southeastern states have enacted cuts in Medicaid or children's health insurance programs: Florida, Georgia, Louisiana, and Tennessee. Cuts include reduced or frozen reimbursements to health care providers. The CBPP also reported that several states have also made cuts to education budgets, including K-12 and higher education budgets. In addition, state employment has also been curtailed. For example, Georgia imposed furloughs and/or pay cuts for some state employees, and Tennessee’s governor announced the elimination of more than 2,000 state positions, about 5 percent of the state workforce. Hiring freezes have also been ordered in Alabama, Florida, and Georgia.

The American Recovery and Reinvestment Act
Christina Romer, chairman of President Obama’s Council of Economic Advisors, testified before Congress in October that a total of $43.8 billion in federal stimulus has been devoted to state fiscal relief. An informal Atlanta Fed survey of Southeastern state budget officials found that the majority of these funds was being applied to address budget shortfalls in Medicaid and education. But as noted earlier, budget gaps persist. While it’s clear the ARRA has helped states under fiscal stress, it has not completely bridged budget gaps.

FRB Atlanta President Dennis Lockhart noted in a September 30 speech in Mobile, Alabama, that "I agree with all who are declaring that a technical recovery is under way."

Improvements can also be seen at the state level. Two Southeastern states showed monthly increases in their coincident economic activity indexes in September compared with zero in July and one in August. For those states that continued to experience month-to-month declines, the rate of the deterioration was much smaller than earlier in 2009. Unfortunately for states budgets, the emerging recovery will not result in immediate relief.

The Rockefeller Institute of Government estimates that it takes three to five years after the onset of serious revenue declines before states again reach their precrisis levels. The chart below, taken from a September presentation by Senior Fellow Donald Boyd, plots this analysis.


Summing up, the impact of the recession on state government finances has been and remains severe. The downturn in economic activity has led to declines in state sales tax intake as well as drops in other revenue resources. Budget cuts have been enacted, and the relief from federal stimulus funds has not fully mitigated the budget shortfalls. As a result, pressure on state budgets remains significant. Despite the fact that the economy is growing again, state finances are expected to remain challenged over the next several years.

By Michael Chriszt, an assistant vice president in the Atlanta Fed's research department

November 4, 2009 in Recession, Southeast, Taxes | Permalink


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Excepting Florida, all of those states are already losers. They take more than they give WRT federal tax dollars. Very strange considering the strong 'conservative' and 'individual freedom' sentiments in those areas, eh?

Posted by: SoltanGris | 12/09/2009 at 10:05 AM

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State revenues and recessions, part one

This recession has hit state government finances hard. Just how hard is the subject of The Nelson A. Rockefeller Institute of Government's October State Revenue Report.

"Total state tax collections as well as collections from two major sources—sales tax and personal income—all declined for the third consecutive quarter. Overall state tax collections in the April-June quarter of 2009, as reported by the Census Bureau, declined by 16.6 percent from the same quarter of the previous year. We have compiled historical data from the Census Bureau Web site going back to 1962. Both nominal and inflation adjusted figures indicate that the second quarter of 2009 marked the largest decline in state tax collections at least since 1963."

The chart below, which is a part of the report, highlights how steeply state revenues have declined during the current recession as compared with previous recessions:


The data are the sum of all states. How does the Southeast compare with the overall picture? Not very well. According to the report,

"One way to gain insight into which states have been hurt most by this crisis is to compare current tax revenue to its recent peak — a period that is different in different states. For this analysis, we determine a peak tax revenue year for each state, defined as the year ending between June 2006 and June 2009 period that has the greatest tax revenue, after adjusting for inflation and population growth. States hit hardest by the housing bust, such as Arizona, California, Florida, and Nevada, generally attained peak tax revenue in 2006 and have been heading downhill since then."

The table below lists states in order of how deep the tax revenue decline has been:


Two states in the Sixth Federal Reserve District—Florida and Georgia—are in the top five. Tennessee is 19th on the list. Louisiana, Mississippi, and Alabama are also negative but less so than most other states.

Next week we'll look into what state governments are doing to cope and investigate just how long we can expect the states in the region to remain under fiscal stress.

By Michael Chriszt, an assistant vice president in the Atlanta Fed's research department

October 28, 2009 in Southeast, Taxes | Permalink


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