Moody’s: Taxation Shift Spells Trouble for Underfunded States

Moody’s Analytics recently conducted a series of stress tests on each state in the US and found that only 16 of the 50 have the funds they need to weather an economic downturn.
Financial Sense spoke with Dan White at Moody’s to discuss which states failed the test, lessons learned from the Great Recession, and why their analysis of state preparedness is a “best-case scenario” in the event of another recession.
Lessons of the Great Recession
One thing we learned from the last downturn in 2008 and 2009 was that it matters whether or not states are fiscally prepared for the next recession.
For one, unprepared states’ ability to recover was greatly impacted because they had to take more desperate measures, either by raising taxes or cutting spending to make up for the loss of economic activity.
‘That’s one of the reasons why the Great Recession was followed by the not-so-great recovery,’ White said.
Poor state preparation led to extraordinary fiscal action to balance budgets, and layoffs followed, with over 750,000 total in the public sector.
‘The reason those job losses were so severe was because states just weren’t prepared and didn’t have any reserves or way of buffering themselves,’ he said.

This post was published at FinancialSense on 11/02/2017.