There’s been a fair amount of focus on the spending-side aspects of state and local government austerity, with recession-induced cutbacks exercising a drag on the economy and thus far preventing us from achieving liftoff, but Diana Carew’s new brief (PDF) is the first look I’ve seen at the tax side. She shows that state governments experienced a curious increase in sales tax revenue despite a sharp drop in retail sales:
This has perhaps a different ideological valence in the U.S. context, but it’s important to note that tax hikes too are a form of austerity. And the economic impact is the same. If you accept a Keynesian view (which you should), crimping people’s spending power in a recession hurts the sales outlook and encourages businesses to curtail hiring and hours, further reducing incomes. The right strategy would have been for the federal government to take advantage of the combination of exceptionally low interest rates and inflation to borrow a bunch of money to write checks to state governments and let them avoid these tax hikes.