States dismal revenue shortfalls and projection for the upcoming years, expected rise in both the long-term unemployment and the number of workers who will exhaust their regular unemployment benefits, rising percentage of individuals below poverty level since 2000, and trends in sates tax structure have important implications for tax policy.
In more than half of the states, revenues are below their projections and many of them face the tightest fiscal conditions they have seen in decades. The past trend in reduction of federal grants to states and localities will continue to finance the proposed tax cuts and additional homeland security.

These tight fiscal circumstances have elevated discussion on raising taxes, cutting expenditures and pursuing other emergency measures that have broad effect on lower and middle income population. States which have revenue structures less responsive to economic growth are considering restructuring their system of raising revenues. And a number of states are implementing spending cuts, spending freeze, and a combination of cut and freeze to deal with current revenue shortfalls and prepare for the worse to come. Considering that this is the election year, the worst is still to come.

Budget shortfalls require a close attention to changes that would make states’ tax structure more regressive. In light of the fact that closing corporate income tax loopholes runs the risk of losing footloose companies, and additional income tax brackets for wealthy taxpayers encounters opposition by policymakers in many states, regressive taxes or their proxies will be considered. Pressure will be on taxation of food, heating fuels, clothing, residential real property, and raising fees, and of course creating lotteries. On the expenditure side, the emerging picture is on the same wave length. Cuts in public education spending, especially for higher education, in some states is already being considered, forcing students and their families to carry a larger loan for their college education, and thus limiting access to many.

This paper will examine the recent restructuring of state and local fiscal policies, coping with cycles of fiscal stress and their impact on the middle class and the poor. Trends in fiscal capacity, federal aide to states and localities, and special programs to assist the poor including tax incentives, child credit, and federal spending on these programs will be examined.

Data will be from US Census, BEA, CBO and state and local government sources.