Recessions mark a distinct phase of the overall business cycle, beginning with a business cycle “peak” and ending with a business cycle “trough.” Between trough and peak the economy is in an expansion. The National Bureau of Economic Research (NBER) identifies dates for national recessions, which can vary in overall duration and magnitude. While NBER sets dates for the peaks and troughs of national recessions, no dates are set for turning points in state economies. State economic downturns vary in magnitude, duration, and timing, and do not necessarily coincide with dates identified for national recessions. NBER defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production, and wholesale-retail sales. NBER uses several monthly indicators to identify national recessions. These indicators include measures of GDP and gross domestic income (GDI), real personal income excluding transfers, the payroll and household measures of total employment, and aggregate hours of work in the total economy. Since 1973, NBER has identified six national recessions. These recessions have varied considerably in duration and magnitude (table 1). For example, real GDP declined by 4.1 percent over the course of the 2007- 2009 recession, which lasted 18 months. Similarly, real GDP declined by about 3 percent during the 1973-1975 and 1981-1982 recessions, both of which lasted 16 months. In contrast, real GDP declined 1.4 percent and 0.7 percent in the 1990 and 2001 recessions, respectively, both of which lasted 8 months. States are affected differently by national recessions. For example, unemployment rates have varied across states during past recessions. During the course of the 2007-2009 recession, the national unemployment rate nearly doubled, increasing from 5.0 percent to 9.5 percent. The unemployment rate in individual states increased between 1.4 and 6.8 percentage points, with a median change of 4 percentage points (figure 1). In contrast, a smaller national unemployment rate increase of 1.3 percentage points during the 1990-1991 recession reflected unemployment rate changes in individual states ranging from -0.2 to 3.4 percentage points. Recent economic research suggests that while economic downturns within states generally occur around the same time as national recessions, their timing—or entrance into and exit out of the economic downturn— and duration varies. Some states may enter or exit an economic downturn before or after a national recession. Other states’ economies may expand while the country as a whole is in recession. States can also experience an economic downturn not associated with a national recession. States’ differing characteristics, such as industrial structure, contribute to these differences in economic activity. For example, manufacturing states tend to experience economic downturns sooner than other states in a recession, while energy sector states are often out of sync with the country as a whole. The federal government has multiple policy options at its disposal for responding to national recessions, although federal policy responses are not necessarily limited to the time periods of national recession. For example, in response to the recession beginning in December 2007, the federal government and the Federal Reserve together acted to moderate the downturn and restore economic growth when confronted with unprecedented weakness in the financial sector and the overall economy. The Federal Reserve used monetary policy to respond to the recession by pursuing one of the most significant interest rate reductions in U.S. history. In concert with the Department of the Treasury, it went on to bolster the supply of credit in the economy through measures that provide Federal Reserve backing for a wide variety of loan types, from mortgages to automobile loans to small business loans. The federal government also used fiscal policy to confront the effects of the recession. Existing fiscal stabilizers, such as unemployment insurance and progressive aspects of the tax code, kicked in automatically in order to ease the pressure on household income as economic conditions deteriorated. In addition, Congress enacted legislation providing temporary tax cuts for businesses and a tax rebate for individuals in the first half of 2008 to buoy incomes and spending and created the Troubled Asset Relief Program in the second half of 2008 to give Treasury authority to act to restore financial market functioning. The federal government’s largest response to the recession to date came in early 2009 with the passage of the Recovery Act, the broad purpose of which is to stimulate the economy’s overall demand for goods and services, or aggregate demand. Fiscal stimulus programs are intended to increase aggregate demand—the spending of consumers, business firms, and governments—and may be either automatic or discretionary. Unemployment insurance, the progressive aspects of the tax code, and other fiscal stabilizers provide stimulus automatically by easing pressure on household incomes as economic conditions deteriorate. Discretionary fiscal stimulus, such as that provided by the Recovery Act, can take the form of tax cuts for households and businesses, transfers to individuals, grants-in-aid to state and local governments, or direct federal spending. In response, households, businesses, and governments may purchase more goods and services than they would have otherwise, and governments and businesses may refrain from planned workforce cuts or even hire additional workers. Thus, fiscal stimulus may lead to an overall, net increase in national employment and output. The federal government may have an interest in providing fiscal assistance to state and local governments during recessions because doing so could reduce actions taken by these governments that could exacerbate the effects of the recession. Output, income, and employment all tend to fall during recessions, causing state and local governments to collect less revenue at the same time that demand for the goods and services they provide is increasing. Since state governments typically face balanced budget requirements and other constraints, they adjust to this situation by raising taxes, cutting programs and services, or drawing down reserve funds, all but the last of which amplify short-term recessionary pressure on households and businesses. Local governments may make similar adjustments unless they can borrow to make up for reduced revenue. By providing assistance to state and local governments, the federal government may be able to forestall, or at least moderate, state and local governments’ program and service cuts, tax increases, and liquidation of reserves. The federal government has provided varied forms of assistance directly to state and local governments in response to three of the past six recessions (figure 2). States have been affected differently during each of these recessions. For example, unemployment rates, entry into, and exit out of economic downturns have varied across states during past recessions. See appendix III for a description of each piece of legislation. Congressional decisions about whether to provide fiscal assistance to state and local governments ultimately depend on what role policymakers believe the federal government should take during future national recessions. Perspectives on whether and the extent to which the federal government should provide fiscal assistance to state and local governments are far-ranging—some advocate for not creating an expectation that federal fiscal assistance will be provided, while others argue for a greater federal role in providing fiscal assistance to state and local governments in response to national recessions. Some policy analysts warn against creating an expectation that federal assistance will be available to state and local governments. These analysts contend that federal fiscal assistance can distort state and local fiscal choices and induce greater spending of scarce state funds. For example, the matching requirements of federal grants can induce state governments to dedicate more resources than they otherwise would to areas where these resources are not necessarily required. According to these analysts, federal fiscal assistance to state and local governments reduces government accountability and erodes state control by imposing federal solutions on state problems. Those who hold this perspective see little justification for insulating state governments from the same fiscal discipline that other sectors of the economy follow during a recession. In contrast, other policy analysts favor a federal role in promoting the fiscal health of state and local governments during economic downturns. Proponents of this view contend that during economic downturns, state and local governments face the dilemma that demand for social welfare benefits increases at the same time that state and local governments’ ability to meet these demands is constrained as a result of decreasing tax revenues. General revenues collected by state and local governments over the past three decades are procyclical—typically increasing when the national economy is expanding and decreasing during national recessions, relative to their long-run trend. Own-source revenues, which made up about 80 percent of state and local general revenues in 2008, and total tax revenues, which made up about 68 percent of state and local own-source revenues in 2008, display similar cyclical behavior. In addition, state and local revenue growth lagged the resumption of national economic growth after the 2001 and 2007-2009 recessions, but preceded it during the 1981-1982 and 1990- 1991 recessions. State and local governments’ current tax receipts have declined in each of the six national recessions since 1973. However, both the severity of these revenue declines and the time it has taken for revenues to recover has varied (figure 3). During the most recent recession, state and local governments experienced more severe and long-lasting declines in revenue than in past recessions. For example, over the course of the 2007- 2009 recession, current tax receipts declined 9.2 percent—from $1.4 trillion in the fourth quarter of 2007 to $1.2 trillion in the second quarter of 2009—and had not yet returned to the peak level 5 quarters after the end of the recession. In contrast, the recessions beginning in 1980, 1981, and 1990 were less severe. For example, over the course of the 1990-1991 recession, current tax receipts declined less than 1 percent—from $789 billion in the third quarter of 1990 to about $785 billion in the first quarter of 1991—and recovered as the recession ended in the first quarter of 1991. Larger revenue declines during the two most recent recessions have coincided with increased volatility in state and local government revenues during the past two decades.