This analysis of seven states (California, Colorado, Florida, Michigan, Mississippi, New Jersey, and Washington) shows that the severity of the current revenue crisis far exceeds that of the recession that triggered it because states cut taxes and expanded programs based on unsustainable revenue growth during the late 1990s. All of the states studied responded to revenue declines with short-term solutions -- using reserves, transferring other funds to the general fund, refinancing debt, and shifting expenditures or revenues across fiscal years. All but New Jersey and Washington cut spending. Only New Jersey relied heavily on tax increases. The authors suggest that states should be realistic about the sustainability of future revenue trends and should not count on federal help. States should also build up reserves and be able to draw on them when needed, and should make tax policies symmetrical rather than place special barriers against tax increases.
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