How the States Are (Barely) Coping 21 comments
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Somewhat buried in all of the talk about fiscal stimulus, bank bailouts, auto company bankruptcies and the generally awful state of the world has been the predicament that the various states of the Republic are experiencing. The fiscal stimulus plan sticks a wad of gum in this rather large breach in the dike, but it won’t stop the flood from coming.
The Center on Budget and Policy Priorities (hat tip Calculated Risk) has quite a good post which defines the scope of the problem in a series of well put together graphs and tables and discusses the potential policy responses. The opening paragraph of their report neatly summarizes the scope of the crisis:
States are facing a great fiscal crisis. At least 46 states faced or are facing shortfalls in their budgets for this and/or next year, and severe fiscal problems are highly likely to continue into the following year as well. Combined budget gaps for the remainder of this fiscal year and state fiscal years 2010 and 2011 are estimated to total more than $350 billion.
The table below shows the likely development of the budget shortfalls.
It has been an article of faith among economists and the media that states cannot at this time raise taxes or significantly cut back services for fear of making the recession worse. To that end, the fiscal stimulus bill contained a number of provisions that transfer federal funds to the states. Semi-discretionary funds for infrastructure projects will presumably allow the states to maintain budgeted expenditures, and targeted transfers for social welfare programs like Medicaid are designed to fill developing gaps in the funding capacity of the states.
All of that is well and good, but it fails to do anything more than maintain existing levels of spending and alleviate the immediate need for the states to access very inhospitable credit markets. The longer term is no brighter, and it’s doubtful that a continuing flow of funds from the federal government can or should be the solution.
The simple fact is that the states overspent during the boom and have no reasonable means of closing the gap they currently face. To compound the problem, those that relied heavily on property taxes as a source of revenue will likely see a significant decline in their taxable base as properties are reassessed. To add insult to injury most if not all, are laboring under fictitious accounting for pension liabilities, a tsunami that is just years away from swamping them. It is not putting too fine a point on the problem to suggest that the states have little choice but to both increase taxes and restrict services over the longer term in order to bring their fiscal house in order. To say that this will obviously act as a drag on the recovery is stating the obvious.
Since the outcome of the current economic crisis is anything but certain, the plight of the states may be worse than it currently appears. Credit markets are likely to be inhospitable to any borrower that cannot demonstrate a sound financial base. Additionally, if the recovery results in decreased consumption, a greater propensity to save, and a relatively moderate housing recovery, then the fiscal situation is likely to be more attenuated.
It’s probably not a stretch to suggest that we may well be at a rather important juncture in the role of the states in the federal system. So far, Washington seems loathe to scale back programs and appears to be intent on using the fiscal might of the country to maintain the status quo. Since many of those social programs require the participation of the states and since those spending responsibilities appear to have outstripped their capacities, the rather large question looms as to who exactly is going to fill the gap. It’s a question that goes far beyond economics and to the basic relationship between the states and the federal government. The manner in which it is solved will have profound implications for governance and power in the years ahead.
In the final analysis, the states have been reduced to financial basket cases. The recovery of their economies is based on a return to an economy that many believe not to be in the best long-term interests of the country. They cannot be allowed for the moment to take the steps necessary to put their houses in order and therefore have to rely on the federal government for survival. Beyond the immediate situation, it is difficult to see a scenario in which significant cuts in services and higher taxes represent at least for the medium term the only solution. That may not be politically acceptable, so the federal government may indeed agglomerate more power to itself at the expense of federalism.
Not a very inviting set of circumstances.
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If conservatives have their way on government cuts it would sound like this: "Sorry you lost your job, now we are taking away your hospital, cramming your kids into classrooms. and instead of fixing potholes, you'll have buy new lea springs every year."
Social programs (public goods) have a place in the overall economic system. In a downturn, they maintain social order and preserve community confidence, if administered properly. cuts in services always, always backfire on the larger economy. A downturn should lead to probes for better efficiency, for sure, but big cuts are confidence killers. They make hard hit communities not just "troubled" but outright desperate.
The states would do well to use that argument in their favour.
I saw good pictures of assemblymen sleeping in the chambers last night! A far cry from visiting the galleries in 2002, when not a one could be found. Good! Let them do some real work, sweat it out, like the rest of us!
Good Luck and May your Dow never Jones!
On Feb 17 01:44 PM Just Say Whoa! wrote:
> "The simple fact is that the states overspent during the boom..."
>
>
> That's not a fact!
>
> Actually, the states all tax people as a % of Federal. Federal taxes
> go down, state taxes go down. That's the "simple fact" you were looking
> for.
>
> The Fed over taxcut the states.
>
> If you look at actual spending, after inflation, adjusted for population
> growth, you won't one state that substantially increased it's spending.
>
>
> Not one.
>
Even if you claim that there's no over spending, spending tracks GDP. If GDP falls 10 or 15%, spending should fall to keep government in line with the economy. This isn't a temporary change in revenues, it is the new reality of a poorer nation. States that try to keep up spending will just watch their jobs move south and east, or overseas, and they will enter the final death spiral, since they're almost all screwed demographically as well.
> growth, you won't one state that substantially increased it's spending.
>
>
> Not one.
Nonsense. Washington State's budget increased 31% from 2005-2008:
seattletimes.nwsource....
Population increased 5%:
www.ofm.wa.gov/pop/stf...
And inflation (according to CPI) was 9%:
www.bls.gov/data/infla...
14% != 31%
Initial Comment:
States derive their revenues from a variety of sources (sales & use, business franchise, cigarette, gasoline and other taxes), which have nothing to do with any measure of federal tax paid. Also, even for those states that use federal taxable or AGI as a measure of state personal taxable income, cuts in federal tax RATES would not affect state tax revenues. And a few large states don't have individual income taxes or have individual income tax regimes that are not pegged in any way to the federal calculation.
Second Comment: I found your assertion "after inflation, adjusted for population growth, you won't [find?] one state that substantially increased it's spending" to be difficult to swallow so I checked my state, Ohio. According to US Census Bureau, Ohio's population is estimated to have increased 0.5% from 7/03 to 7/06. Per BLS, CPI went up 10.7%, and per Ohio OMB, tax revenues went up 19.7% in this period. That's a real per capita increase of 8.5%. If you look at spending, however, the increase is less, only about 1.2% over the same period b/c Ohio went from a deficit to a surplus, still up but arguably not substantially.
Of course, looking at a longer historical context, federal, state and local - has increased pretty dramatically over the past 5 decades as a percentage of GNP and on a per capita basis.
On Feb 17 01:44 PM Just Say Whoa! wrote:
> "The simple fact is that the states overspent during the boom..."
Another state problem: how many offer retirement at 70% to even 100% of their worker's highest salary? These ridiculous entitlements will be a huge source of grief as the pension funds are decimated just in time for the boomers to begin drawing their retirement benefits.
They will have to cut benefits (fat chance) or raise payouts from those still working, along with other tax hikes.
This will end any independence states have from Washington, as they will be beholden to the federal printing press to fund their budgets. Lincoln's dream of absolute power over the states will be accomplished, and just in time for his 200th birthday!
You say states didn't overspent . The state of Goergia now " gives" FREE college education to students who maintain a B average , no matter what their parents income level! Talk about nuts , folks sre going belly up here due to rising property taxes ! Perfectly good older schools are torn down with massive new scools built as that what the yuppies demand . Hell if you warked hard in Ga + now are ill or retired , you simply do not count ! Educators pensions here are 90% of their pre-retirement incomes ! + they get social scurity to boot ! Educators live in luxury in Ga , while the rest goes down the tubes !
On Feb 17 02:12 PM Aristophanes wrote:
> Just Say Whoa!, that's an excellent observation.
>
> If conservatives have their way on government cuts it would sound
> like this: "Sorry you lost your job, now we are taking away your
> hospital, cramming your kids into classrooms. and instead of fixing
> potholes, you'll have buy new lea springs every year."
>
> Social programs (public goods) have a place in the overall economic
> system. In a downturn, they maintain social order and preserve community
> confidence, if administered properly. cuts in services always, always
> backfire on the larger economy. A downturn should lead to probes
> for better efficiency, for sure, but big cuts are confidence killers.
> They make hard hit communities not just "troubled" but outright desperate.
>
>
> The states would do well to use that argument in their favour.
And look who’s been running the states that are in the most serious trouble—leftists.
NY and NJ and CA and even the small RI, ME, MA, et al., are in trouble, and then there’s the broke and busted Rustbelt.
How many times have the rest of us bailed NY out? I know we did it in the 1970s.
Most of the other states have managed to come up with a decent budget, by using reserve funds that sane states put up for emergencies and by cutting spending.
Let the broke states raise taxes; they’ll end up with nothing but the parasitic class left. That’s what they deserve, if they don’t change their ways.
Thanks for reading this article.
On Feb 17 01:44 PM Just Say Whoa! wrote:
> "The simple fact is that the states overspent during the boom..."
>
>
> That's not a fact!
>
> Actually, the states all tax people as a % of Federal. Federal taxes
> go down, state taxes go down. That's the "simple fact" you were
> looking for.
>
> The Fed over taxcut the states.
>
> If you look at actual spending, after inflation, adjusted for population
> growth, you won't one state that substantially increased it's spending.
>
>
> Not one.
>
Well, I reside in the socialist republic of California, and I know as an ABSOLUTE fact that this article is dead on the money with California. In California when we don't see the income tax revenue or property tax we desire, we float bonds. Some liberal politicians figured out a while ago that if we were to require a certain set percentage of all revenues go to one black hole cause like education, it will leave other projects in need of capital. Then after a few years of needing, politicians will start pointing out our crumbling and neglected infrastructure and lack of prison shelf space and then float more bonds.
Now, here we are with a stifling budget deficit. The State figures raising taxes in this economic environment is smart. I think we are going to see new faces in November 2010.
California is dysfunctional because it takes 35% of your pay, but not enough of the misallocated earnings in predatory industries (and a lot of sucking at the teat military suppliers fall under that category). Agriculture is embarrassingly subsidized yet imports cheap Mexican labour that then needs social services. Prime Malibu waterfront properties are taxed at rates lower than inland houses 90% smaller, yet their swimming pool water is worth $20,000 in taxpayer subsidies.
California's rot is about destroying the best middle class value of all; and that is a responsible government that clearly defines what is and is not a public and good, taxes to support those at a reasonable level. Good conservatives used to advocate a reasonable level of taxation for properly delivered services. I actually like Mike Huckabee, though socially he's in another world from my perspective. He "got it". he knew the value of clearly defining public service and paying for it with appropriate, targeted taxes. The American Revolution wasn't partially about getting rid of taxes; it was about efficient, fair taxation.
The problem with American conservatives is they start to believe their own rhetoric that government is useless. They go on irresponsible tax cut binges. Then someone flies a few airplanes into buildings and suddenly deficit spending is all the rage, with no sacrifices, no cutbacks, no end to subsidies, etc. Conservatives have no credibility anymore. Start by eliminating the subsidies to entrenched business and then you have some moral credibility about civil servants. Most are just clerks and teachers. Some remove the bodies in car wrecks, immunize children, service the sewers. They need a roof too.
BTW-I am taxed at a 33% rate in Canada and I have a public health system where all citizens are insured, and it costs only 9% of GDP (US = %14.5). Clearly something is wrong at your end if we have equivalent taxes (and you should see my heating bill!). And our political system is much farther left wing than any California Democrat.
On Feb 17 10:55 PM jksisco wrote:
> you obviously don't live in California. We have been a Democratic-controlled
> state for years and are currently $45 BILLION in the red and we have
> prop 13 which was supposed to keep government from getting out of
> control. I'm a Conservative and I understand that we must provide
> for those facing challenges, however, everything has a limit. There
> are no free lunches. You can't provide a safety net for everyone,
> someone has to pay the bills. Between state and federal income taxes
> I'm looking at 35% reduction in my take home pay, 1/3 of what I produce
> is gone and their asking for more. So how am I supposed to keep a
> roof over my head, feed my family, pay my bills, save for retirement,
> help my kids get an education and fork over more so joe government
> worker can retire at 55 at 90% of his last salary with a life expectancy
> to 85 with full medical benefits, that's a lot of moola. Sorry pal,
> social spending in this country has gone overboard.
Aristophanes argues that the states need to act counter-cyclically. That would be fine if they had done so on the way up. But they couldn't resist the easy $s. So, now they have to cut on the way down.
And don't assume that the Federal government will be either willing or able to help. To do so, they will have to borrow still more - putting still more burden on the future and further reducing the (miniscule) possibility that either the Federal or state governments will be able to meet all their unfunded future liabilities for pensions, welfare and health.
www.taxfoundation.org/...
I found 4, and 6 others don't have income tax.
As many other posters have stated their problems have to do with over spending during the boom, and ridiculously generous pension payouts to employees (my Moth-in-Law worked for 36 yrs, and retired @ 58 on 85% salary + COLA...if she lives to 84 [which according to SS Mortuary Tables she has a 50% chance of doing] she will have spent 2/3 of her working life in retirement, earning near her full salary), its an unfortunate fact that most state & municipal workers today have their heads in the sand if they think their benefits will be anywhere near as generous.
Barring any major demographic or economic shift to the positive, I suspect within 10-15 years the state & muni pension will go the way of the private industry pension.
I didn't do any research, but I find it hard to believe in this area PA, NJ, NY and DE have NOT seen expenditures grow at a significantly higher rate than CPI and Pop growth.
On Feb 17 01:44 PM Just Say Whoa! wrote:
> "The simple fact is that the states overspent during the boom..."
>
>
> That's not a fact!
>
> Actually, the states all tax people as a % of Federal. Federal taxes
> go down, state taxes go down. That's the "simple fact" you were looking
> for.
>
> The Fed over taxcut the states.
>
> If you look at actual spending, after inflation, adjusted for population
> growth, you won't one state that substantially increased it's spending.
>
>
> Not one.
>
The effects of compounding are very clear: government spending grew twice as fast as our ability to pay for it. Government spending is unsustainable. Even in a fairly liberal state like California, the population does not support unlimited taxation.
While members of Congress decried the accounting slight of hand at Enron -- the facts are that the original off balance sheet financing schemes were created by government.
FNMA and FHLMC were "privatized" (sort of) as part of a LBJ administration budget "balancing" fraud....
After voters in NY state imposed strict debt restrictions on their government, NY state created the NY Turnpike Authority to exploit a loophole in the restrictions.... Off balance sheet financing was born. Now every state employs massive amounts of off balance sheet financing in all sorts of "authorities"
Americans need to think twice when asking for government services to be added. We cannot spend money twice as fast as we earn it -- unless we want to pass a bankrupt country to our kids.