States need federal bailout commitments now to avoid dragging the nation back into recession in 2011, according to the Center on Budget and Policy Priorities.

Even though total state tax revenues through June were $865 million more than for the same period just three years ago, year over year declines will continue, raising projected deficits for fiscal years 2011 and 2012 to $260 billion more than remaining current federal recovery aid.

In a briefing Wednesday, Iris J. Lav, a CBPP senior advisor, and Mark Zandi, co-founder of Moody’s economy.com, said states must begin budgeting now for fiscal year 2011 facing the Dec. 31, 2010 “cliff” of federal recovery funds ending. Lav said “with no assurance of federal relief … new budget cuts and tax increases … could take a full percentage point off Gross Domestic Product and cost 900,000 jobs.”

That would threaten any “fragile” national economic recovery.

They recommended Congress act quickly to extend or at least phase out American Recovery and Reinvestment Act funds beyond the end of next year.

Lav and Zandi acknowledged state revenues remain at levels of just three or four years ago, but Lav said, “between ’05 and now you’ve had increases in costs.” Zandi said, “We now have 10 percent unemployment instead of 5 percent then,” increasing demand for state services as revenue declines.

According to U.S. Census data, total state tax revenues for the 12 months ending in June dropped 8 percent from the same period in 2008, but they were 0.1 percent above the same period in 2006, $59 billion, or 9 percent, more than the 12 months ending in June 2005, and $123 billion, or 21 percent, higher than in 2004.  Between then and 2008, states increased tax revenue $232 billion, or 42 percent more.

Yet Zandi said another $75 billion in federal aid is needed “just to fill the hole,” and Lav said “it’s a $140 billion hole, but $50 billion would bring states to a reasonable place.”

Zandi said “poor decision making” by state officials put them in a long-term bind when the recession hit.

According to a January Government Accountability Office report, “The cumulative 2-year projected operating deficit (for state and local governments) totals approximately $312 billion” through 2010. GAO projects deficits through 2057.

Asked if deficit estimates include unfunded retirement obligations to state employees, Lav and Zandi said they do not. Two years ago, prior to the financial markets crash, the Pew Charitable Trust estimated those obligations at $2.73 trillion.

Zandi and Lav said federal assistance now is just for states’ operating expenses and does not include long-term obligations.

But Zandi added that federal help now offers “the biggest bang for the buck” in preventing a fall back into recession. “If this recovery unravels, it will be very difficult to get out. You would have to go back to the Great Depression to find parallels.”

Read the full Center on Budget and Policy Priorities reports:

By Frank Keegan, Senior Editor of Watchdog.org

Email:  Frank.Keegan@franklincenterhq.org