Auto crisis roils state budgets nationwide
By Tami Luhby
December 13, 2008 | CNNMoney.com
The Big Three automakers' troubles are wreaking havoc on state and local budgets far beyond the Rust Belt. And a collapse of even one of Detroit's car manufacturers would hit governments while they are down.
States and cities around the nation are already slashing budgets and services as the deepening economic downturn shrinks their coffers. To close their budget gaps, governments are cutting public health programs, reducing aid to public school and universities, and laying off workers.
Problems in the auto industry are only exacerbating this turmoil. Not only have nearly 800,000 people lost car-related jobs this year, accounting for 40% of the increase in unemployment, but auto sales are at a 26-year low and at least 660 dealerships have closed their doors.
This means state and local governments are collecting less in personal income taxes, corporate business taxes and sales taxes -- all critical to funding their operations. State tax revenue fell 2.6%, when adjusted for inflation, in the third quarter, according to preliminary figures from the Rockefeller Institute of Government.
"If we see a significant falloff in employment and a continued decline in auto sales, the states are really going to see it and feel it," said Scott Pattison, executive director of the National Association of State Budget Officers. "It just hits so many sources of revenue."
Collapse would hit states hard
Any additional weakening of the auto industry would further reduce government revenues, while increasing the amount the public sector has to lay out for unemployment benefits, welfare and Medicaid, experts said.
A 50% reduction in the Big Three's domestic operations, for instance, would result in 2.5 million people losing their jobs, according to the Center for Automotive Research. That would drain $20.5 billion in personal income taxes at the federal, state and local levels in 2009, while forcing the public sector to spend an additional $11.9 billion in benefits.
[Gee, by comparison a $15 billion loan doesn't seem like such a bad deal, does it? -- J]
Every state would feel the impact. Even if only GM, the most troubled of the automakers, shut down, 914,000 jobs would be lost nationwide, according to the Economic Policy Institute. This includes people who work in the plants, in auto suppliers and in businesses that support the industry, such as nearby restaurants and shops.
Of course, Michigan, Indiana and Ohio would be among the hardest hit, losing 2.5%, 1.4% and 1.1% of each state's total employment, respectively, the institute found. But all would see some decline in jobs, with Alabama losing 1.1% of its state workforce and New Hampshire shedding 0.6%.
"When people lose their jobs, it has a disproportionate effect on the tax base because these are good jobs with good wages," said Robert E. Scott, senior international economist at the Economic Policy Institute. "The demand for services goes up, while tax revenue goes down. It's a real recipe for disaster for state and local governments."
The slowdown in consumer demand for cars is also putting a crimp in state budgets. Americans bought 37% fewer cars in November than they did a year earlier, government figures show.
Though precise figures are difficult to come by, this big-ticket item accounts for about 12% to 15% of sales tax revenues in many states, estimates the Center on Budget and Policy Priorities.
Alabama, for one, has seen a 10.6% decline in sales taxes from car purchases for fiscal year 2008, which ended Sept. 30, according to state officials. Gov. Bob Riley is expected next week to announce how he will close a looming budget deficit, which the Center for Budget and Policy Priorities estimates is at $458 million, or 5.5% of the general fund.
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