State and local governments in Maryland, Virginia and the District spent $7.82 billion more than they collected in revenue between 2007 and 2012, during the throes of the economic downturn, according to data released from the U.S. Census Bureau last month.
The trend mirrors national data in which state and local government expenditures largely outpaced revenue during that period, forcing some to take on extra debt. Many governments have since changed course in the aftermath of the recession, clamping down on spending and taking in more in tax revenue. But economists say the picture in the Washington area, where economic growth has been lagging behind that of the rest of the nation, continues to be marked by millions of dollars in shortfalls.
Maryland and Virginia continue to face major shortfalls — $1.2 billion and $2.4 billion, respectively — according to recent estimates. A sluggish economic recovery in the Washington region, coupled with a spate of federal government budget cuts, have led to higher levels of unemployment and, as a result, less income tax revenue for local governments.
As a result, governments are taking on more debt and making plans to lay off workers and slash budgets to make up for shortfalls. Virginia Gov. Terry McAuliffe (D) announced plans to cover the gap in October, while Maryland’s budget secretary has ordered state agencies to cut back on spending in recent months.
Some say one of the biggest hits stemmed from the automatic federal budget cuts known as sequestration.
“Everybody knew the sequester was going to have some impact, but nobody knew it would have the level of effect that it did,” said Stephen Fuller, an economist at the Center for Regional Analysis at George Mason University. “It showed up in Maryland before Virginia. Virginia began to show some revenue weakness in fiscal 2013, and 2014 has been a disaster.”
The erosion of high-paying jobs in the region has meant that state and local governments are collecting less money from income taxes, which are an important source of revenue.
“We continue to lose jobs that pay $100,000 and add jobs that pay 50- or 40- or $30,000,” Fuller said. “We haven’t replaced any income-growing capacity at the top, so revenues are going to be worse in the current year and still worse in the following year. There is no recovery in sight on this matter.”
State and local governments in Virginia spent $1.03 billion more than they took in between 2007 and 2012, while expenditures in Maryland outpaced earnings by $6.07 billion.
The District government spent $13.82 billion during the same period, about $715.6 million more than it earned.
Federal government cutbacks in recent years have added to the problems.
“The last few years, the major drag on the Maryland and Virginia economies and also on the D.C. economy has been declines in federal government spending,” said Anirban Basu, chief executive of Sage Policy Group, an economic consultancy based in Baltimore. “That will continue to be a source of challenge for the region.”
Nationally, state and local governments spent $118.15 billion more than they collected between 2007 and 2012. Total expenditures during that period increased by 18.2 percent, from $2.7 trillion to $3.2 trillion, while total revenue declined 3.2 percent over the same five-year period, from $3.1 trillion to $3.0 trillion.
A volatile stock market also took its toll. A decline in employee retirement revenues, which includes earnings on investments and contributions, dealt a particularly large blow to revenue figures for state and local governments. Nationally, earnings from retirement revenues dropped 67.7 percent, from $533.3 billion to $172.0 billion, between 2007 and 2012.
“State and local government revenues continue to be impacted by capital market fluctuations, especially employee retirement revenues,” Kevin Deardorff, chief of the Census Bureau’s Economy-Wide Statistics Division, said in a statement.
Economists say the outlook is unlikely to change this year. A continued lack of job growth and growing office vacancies are expected to further push down revenue from income tax and property taxes in the area.
“We should be in very good times right now,” Fuller said. “Ordinarily in a recovery, the revenues start growing a year after the recovery starts and then continues. But [in the Washington region], the hurt gets worse.”
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