Rockefeller Institute: states and localities off critical list, still in intensive care.

• Position: News & Numbers - Government spending

While tax revenues are finally rebounding from the dramatic declines precipitated by the 2001 recession, continued spending pressures and the risk of federal policy changes mean state and local governments must continue to exercise fiscal restraint. This is the conclusion of Donald Boyd of the Rockefeller Institute of Government Fiscal Studies in a recent report entitled "State and Local Governments Face Continued Fiscal Pressure."

Two federal policy issues pose significant fiscal risks for state and local governments: (1) the possibility that the federal government will enact a major overhaul of the federal tax system and (2) the possibility that the federal government will convert Medicaid into a near-block-grant that caps federal spending. Depending on the details of any overhaul of the federal tax system, these proposals could eliminate the deductibility of state and local income taxes and impede on the traditional state-local terrain of sales taxes.

The report points out that Medicaid has returned to double-digit growth rates. According to the National Association of State Budget Officers, Medicaid is now the single-largest area of state government spending, ahead of education. And the Center for Medicare and Medicaid Services...