Posted by: Jeff | September 29, 2010

Responsibility for Taxes and Public Services: States and the Federal Government

Annie Lowrey highlights a report by Meredith Whitney that the next budget crisis is already brewing in several large states:

From 2000 to 2008, states’ tax revenue increased 45 percent, but spending increased 60 percent. To finance the difference — as all states save for Vermont are required to run balanced budgets — politicians used off-balance-sheet vehicles, reduced transfers into pension funds, and borrowed against future revenue. “You borrow from future dollars to benefit the present. Basically generational robbery,” she says. “The bonus [for the government officials who did it] is to get reelected.”

This strikes me as a pretty seriously under-reported story.  Much has been made of the federal debt, and calls to curtail spending have come from both the right and the left during this current election cycle.  However, despite overall agreement that spending and revenue are out of whack, solutions seem to be few and far between.

One proposed solution, most voiced on the right, is to eliminate many federal social programs and public services.  A long-voiced criticism of federal power has been that the U.S. government has usurped roles typically reserved for the state.  Some on the right are now calling for the federal government to abdicate responsibility for services like health care provision and education so that states can once again control these policies locally.

This makes some sense in the abstract, but Whitney’s report makes stark the impossibility of such a shift.  With state governments already in the red, from where are they supposed to summon the funding to offset the end of federal spending on education and health care subsidization?  Should the federal government also leave it to states to decide agricultural subsidization policy?  Obviously this would strongly impact the mainly agrarian states that are already struggling with budget issues (e.g. Ohio, California, Illinois).

It seems clear to me that pushing more service obligations on the states would require them to increase their budget.  And with federal stimulus money running out in FY 2011, this would leave states with few options: 1. opt not to provide these services or increase funding to match federal decreases, 2. borrow against future budgets in order to balance current budgets – the same kind of shell game already happening to large degree in many states, or 3. increase revenue.

It seems to me that increasing taxes in the states is probably even more politically-toxic than at the federal level.  State delegates come from much smaller constituencies, and are subject to greater variation in the whims of voters.   With anti-tax rhetoric already at a fever pitch, this doesn’t seem likely to happen at the state level.

All in all, the budget crisis that the Tea Party has seized upon is more serious than any of us have perhaps realized, and requires more difficult choices than many elected officials are willing to make.

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