State government budgets and the Recovery Act

State and local governments, with revenues reduced sharply by the recession, are responding by cutting services, increasing tax rates, and drawing down reserves; they are also receiving some relief in the form of stimulus funds provided by the federal government. The stimulus funds legislated in the American Recovery and Reinvestment Act only partly offset the recession-induced shortfalls and are scheduled to phase out before most analysts believe state and local governments will see fiscal recovery well underway. Thus, observers are concerned that the state-local sector will create a substantial drag on the overall economy during fiscal year 2011 and into 2012. This brief compiles data on state gaps, responses, and stimulus funding nationwide and discusses potential implications for the national economy.