Posted on 08/09/2003 6:55:24 PM PDT by John Jorsett
Want to know why Gray Davis may soon become only the second governor in U.S. history to be popularly removed from office? One reason may be California's $38 billion deficit. And, while governors in other states are not about to be recalled, many other state budgets are troubled--48 of the 50 are currently in the red. In the new fiscal year, which began recently for most, states face an estimated $70 billion shortfall, and the majority have already spent their rainy-day funds while exhausting the accounting gimmicks that can be used to postpone days of reckoning. Regardless of who ends up governor of California, state deficits will be among the country's leading domestic political issues for the next several years. The National Governors Association warns that states face the "most dire fiscal situation since World War II."
The problem, many insist, is a lack of federal largesse. Writing from his home state of Oregon, Nicholas Kristof declared in a recent New York Times column, "Washington is not just aloof from the pain out here in real America, but is making matters worse." A series of Doonesbury cartoons suggested George W. Bush was personally responsible for the early closure of Portland schools. Governors and mayors now call on Washington to channel them aid. Washington could, of course, rescue the states by throwing them money. But that solution presents a problem of its own: To bail out the states, the federal government would have to obtain money from taxpayers. Taxpayers who live in--states.
Ever since World War II, the nation's governors, Republican and Democrat alike, have relied on a bookkeeping switcheroo in which Congress taxes Americans (that is, residents of states) at a higher rate than the federal budget actually requires and then sends some of the revenue back to states. This arrangement allows governors to denounce the big spenders in Washington while simultaneously relying on the big spenders in Washington to keep state budgets in the black. It also allows state income taxes and other local levies to be artificially lower than if they reflected the true cost of state spending, while focusing voter rage on a federal tax line that is artificially high.
A better--and more honest--policy would be for states, cities, and counties either to cut their budgets or to tax themselves at whatever level is needed to support their spending habits. Blaming Washington for money problems that localities have brought upon themselves simply feeds the unhealthy, but fashionable, pretense that government spending can go up while taxes go down, without consequences.
I'm the only candidate in this race who has ever balanced a budget," Massachusetts Governor Michael Dukakis memorably claimed during the 1988 presidential contest. In the current primaries, former Vermont Governor Howard Dean has bragged, "I'm the only candidate in this race who has ever balanced a budget." In truth, neither Dukakis nor Dean ever came remotely close to balancing a budget, at least in the sense of raising as much money as he spent. The Massachusetts and Vermont ledgers, like all state budgets, were in the black only because of federal aid. In fiscal 2001, 21 percent of state revenue came as federal grants for education, transportation, Medicaid, and a range of other programs. Were it not for such donations from the U.S. Treasury, all states would run perennial deficits.
In turn, national budgets in the postwar era have often dipped into the red owing to federal support of the states. In fiscal 2002, Washington gave $412 billion to the states, more than it spent on defense, while running a $158 billion deficit. Had federal income tax funds not been channeled to states, the fiscal 2002 national budget would have shown a huge surplus; federal taxes could have been cut and the central government still been comfortably in the black. Instead, the U.S. Treasury went into debt to support the states and their cities, while the federal income tax was higher than it might otherwise have been, focusing voter rage on Washington as states could post lower taxes than actually needed to support their spending.
Of course, some state spending, such as that for Medicaid, is mandated by federal law, and Washington should fund what it mandates. But this problem has declined since Congress passed the Unfunded Mandate Reform Act of 1995; meanwhile, the share of state revenue that comes from Washington has steadily increased. According to the Council of State Governments, states' receipts from Washington increased more than 50 percent, in real-dollar terms, during the '90s, in part owing to the funding of what had been unfunded mandates. Washington does impose ever more rules on the states but also grants ever more money.
In truth, many local governments brought their budget woes upon themselves. State spending has increased faster than inflation every fiscal year since 1982. In the decade leading up to fiscal year 2001, when the current recession hit, federal spending rose by about half, while state and local government spending rose 78 percent. State and city government employment has increased in the past decade as federal government employment has declined. For example, in the past four decades, New York City private-sector employment has shown zero growth, while city payrolls rose 20 percent, adding some 90,000 workers whom the same-sized pool of private employees must support.
States also cut taxes during the late '90s by $40 billion--an amount that almost equals the $50 billion budget shortfall states faced at the beginning of fiscal 2003, according to the Center on Budget and Policy Priorities. Throughout the past three decades, Americans paid on average 11 percent of personal income as state and local taxes; but, owing to recent state and local tax cuts, Americans currently pay 10.6 percent of their income in this category. That fourth-tenths of a percent works out to about $35 billion annually, a sizable portion of the current problem. Governors wanted to cut taxes; now they want to hand Washington the invoice.
Current state-budget woes are even less defensible given that states recently gained two significant sources of revenue. They took in about $30 billion in gambling proceeds in 2001, up almost half from the total of five years before, and they also now benefit from the tobacco settlement, in which the major cigarette companies agreed to pay states about $246 billion over 25 years.
Nevertheless, some maintain that the states should receive the next grand federal bailout. Felix Rohatyn, the financier who supervised New York City's financial recovery in the late '70s, has proposed a federal bonus of up to $75 billion per year to the states--a bonus to be paid for by expanding the federal deficit.
But, if borrowing is the answer, why shouldn't the states do it themselves? The answer bailout supporters give is that state constitutions require balanced budgets. Every state except Vermont has a constitution that mandates a balanced budget. But that hasn't prevented states from taking on debt; in 2000, states owed about $548 billion, mainly as development bonds. Financing the construction of schools or highways using bonds, rather than appropriations, moves spending off the part of state books that is governed by balanced-budget rules. Lots of debt can be issued this way, even under a balanced-budget state constitution, since most such clauses have loopholes. Star-crossed California, for example, hopes soon to sell $10.7 billion worth of bonds to keep Sacramento from going into receivership.
Moreover, states make their own constitutions, which can be changed; they already are changing at a dizzying pace. According to Janice May, a professor of government at the University of Texas, in 2000 and 2001 alone, states amended their constitutions some 154 times, including 25 amendments regarding finances. In most states, amending the state constitution requires nothing like the elaborate process required to amend the U.S. Constitution, because state constitutions are mostly administrative boilerplate. If states wanted to do away with their balanced-budget requirements, they could do so easily.
There are signs that a few state and local governments are beginning to shoulder more of their own budgetary burdens. At least 15 states have raised taxes this year or effectively done so by increasing fees or altering assessment formulas. Republican governors in Alabama, Idaho, and Maryland are among those favoring tax increases; the Republican mayor of New York City has raised some taxes and wants to raise more.
Needless to say, no one likes tax increases, but reducing federal contributions to the states, while revamping the system so that state and local taxes rise while federal taxes fall, would be attractive on several levels.
First, it's honest. Voters should know what government costs. The current bookkeeping switcheroo makes state and local governments seem cheaper than they really are, while making the national government seem more expensive than it really is. Small wonder, then, that voter anger is directed toward Washington. Artificially boosted anger toward the federal government distorts politics by lowering public respect for Washington institutions, which must have played some role in making the United States the greatest nation on earth. Artificially increasing the cost of national government also guarantees the endless tedium of presidential candidates running against Washington. Many recent presidents--Jimmy Carter, Ronald Reagan, Bill Clinton, George W. Bush--were governors who ran against Washington while boasting of how well they administered their own state's fiscal houses. This simply is not honest, yet the bookkeeping is set up to encourage such deceit.
Second, to the extent the U.S. federalist system gives states many freedoms, it ought to give them equal responsibilities. States want their views respected, and it is not only Southern politicians who speak of states' rights: Nearly all governors praise the states as "laboratories of democracy." But, if states want to make up their own minds, they ought to pay their own way; if they want to conduct experiments, voters ought to know what the experiments really cost.
Some federal aid to states is justified by the equity principle: Other things being equal, well-to-do states ought to help out poorer ones. But the equity principle applies only to programs specifically designed for the needy, such as Medicaid, not to general state-budget lines, such as transportation funds. It has never been clear why, to use a current example, taxpayers across the nation should bear most of the expense of improving Boston highways so that local drivers don't get stuck in traffic. And consider that, in January, voters in high-quality-of-life Oregon rejected a referendum that would have raised state income taxes to solve state-budget problems and fund a full school year. Already, Oregon has no sales taxes; now, Oregon voters want to shift the cost of their budget dereliction onto voters in other states.
In states and cities across the country, the dynamic is the same. Everyone wants needed money to come from the federal government, which would get it from voters who live in--states. But why should federal taxpayers generally be hit with extra obligations so that California or Alabama or Oregon or any particular state doesn't have to tax itself at the level necessary to support whatever services its voters demand?
"The governors are very much appreciative of the fact they will not have to make draconian cuts or enact tax increases to balance their budgets" quite yet, Kentucky Governor Paul Patton, chair of the National Governors Association, wrote to Congress in June after it passed a littlenoticed $20 billion special appropriation for states. Governors may be appreciative now, but soon they'll likely be asking the federal government for still more--so they can "balance" their budgets and return to denouncing those big spenders in Washington.
Correction: This article originally stated that Felix Rohatyn has proposed a federal bonus of up to $75 per year to the states. In fact Rohatyn has proposed a federal bonus of up to $75 billion per year. The article has been corrected to reflect that change. We regret the error.
And The New York Times is advertising on Drudge!
I'd better start popping the popcorn right now. The End of the World is only minutes away . . .
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