How did a mild recession cause large state budget shortfalls across the nation?
The recent fiscal difficulties faced by nearly all statesincluding Oregonwere caused by several factors. Recession and slow recovery: As incomes declined during the 2001 recession, state revenues fell dramatically. Nationally, in the 2002 fiscal year, state revenues fell an estimated $60 billion below projections based on previous growth rates (Orszag 2003). State tax revenues typically rise by 2 to 3 percent per year (adjusted for inflation) and in line with economic growth. However, they fell by 7.4 percent in 2002 nationally, a much larger decline than during either the 19901991 recession or the 19801982 recession (top graph). Stock market decline: In the late 1990s, state revenues increased significantly on the wave of high-tech and stock market growth. The bursting of the stock market bubble resulted in a sudden drop in income from capital gains (bottom graph). This in turn exacerbated the decline in state revenues, especially in states that rely heavily on income taxes (see FAQ #
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