Why the States Are Broke

Bloated governments, budget gaps, and Parkinson's laws

"For the first time in a long time, someone is going to be minding the store," declared the newly elected governor of a large Midwestern state. The occasion was an April speech defending his proposed budget and restating his campaign promise not to raise taxes. In response, the opposition leader in the state Senate repeated his call for major tax increases to close a yawning budget gap. Among other things, the senator wants to expand the state's sales tax to cover services. "There will be no haircut tax under this administration," the governor's deputy replied testily.

Meanwhile, in a nearby state, another governor was calling for a $2 billion sales tax expansion. His plan would tax services ranging from lobbying to dry cleaning, on top of already enacted increases in excise taxes on cigarettes and gasoline.

The no-new-tax governor was Illinois' Rod Blagojevich -- a Democrat. His legislative antagonist was Pate Philips -- a Republican. And his tax-increasing neighbor was Republican Gov. Bob Taft of Ohio.

Democrats as fiscal conservatives? Republicans as tax hikers? Welcome to the topsy-turvy world of government finance, where political labels can confuse more than inform, where experts specialize in deliberately misleading "analysis," and where all is not as it seems.

Since the onset of recession in 2001, the national economic debate has centered around President George W. Bush's proposed tax cuts, his terror-induced wave of new federal spending, and Capitol Hill squabbles about budget deficits and interest rates. For most Americans, however, these issues are distant, theoretical, and mostly rhetorical. More important are the images they're seeing on breathless local television newscasts and morning chat programs. In Kentucky they've seen convicts released early from crowded prisons. In California they've heard of possible mass layoffs of schoolteachers, following on the heels of a two-week stint of work without pay for Oregon teachers and new janitorial duties for their counterparts in Oklahoma. In Missouri state employees were unscrewing every third light bulb to cut energy bills.

Such images might help explain why polls show so little enthusiasm for the president's proposed tax cuts. Americans already have seen federal tax relief offset by tax increases at the state and local levels, with more hikes expected soon. And they're spooked by the apparent incompetence and penury of the governments that patrol their streets, pave their highways, and educate their children.

The federal government, far removed from the people and subject to interest group politics and the vagaries of international events, is supposed to be the broken institution. States, competing with each other and informed by grassroots common sense, are supposed to exemplify the genius of the American experiment. But reality is more complex. State governments are stumbling, taxing, and growing. Self-proclaimed fiscal conservatives aren't paying enough attention to big-ticket items such as Medicaid or to the long-term structural changes that could at least slow government's growth. And so they remain hostage to basic laws of voter preferences and bureaucratic behavior that push taxes and budgets ever upward.

Fuzzy Math

Numbers don't lie, although I can't say the same for their political abusers. The share of gross domestic product consumed by the federal government shrank for most of the 1990s, with rates of annual spending growth often in the low single digits. At the same time, state and local governments experienced an almost unprecedented growth spurt in both revenues and expenditures. Their share of GDP rose to nearly 13 percent in 2001, up from 11.4 percent in 1990.

Bill Clinton's federal budgets grew more slowly than George W. Bush's have, while the undeniable rise of Republican influence in state capitals during the 1990s did not necessarily result in fiscal discipline. Indeed, a USA Today analysis showed that from 1997 to 2002 Republican-controlled states saw slightly higher annual spending increases (6.85 percent) than Democrat-controlled states (6.79 percent). Taxpayers were usually better off when the governor and the legislative majority hailed from different parties.

The data reveal other surprises. So far, by most accounts, the recession that began in 2001 is one of the mildest on record. Yet also by most accounts, state governments since 2001 have experienced one of the most severe fiscal emergencies since the Great Depression. Is something unique and inexorable going on here?

Many alleged experts on government finance say so. Writing from academic roosts or from policy groups such as the Brookings Institution or the Center for Budget and Policy Priorities, they blame the current crisis on "structural problems" in state tax codes created by the New Economy, uncontrollable inflation in education and health costs, excessive tax cutting by the surging Republicans during the 1990s, and international trade policy. Supposedly non-ideological groups such as the National Governors' Association (NGA) and the National Conference of State Legislatures (NCSL) repeat and amplify these messages to a broader audience, as do gullible or ax-grinding reporters.

States are having trouble, NGA Executive Director Ray Scheppach declared on New Hampshire Public Radio earlier this year, because of "a perfect storm" of long-term fiscal trends. "Most states have systems sort of built for a manufacturing economy of the 1950s," he said, rather than for "a high-service high technology international economy of the 21st century. There's a deteriorating tax base. We don't tax services, and that's where growth is."

The reality is more prosaic. What we have seen in various states is little more than the confirmation of old maxims about how and why governments grow and what, if anything, can be done to arrest that growth. One useful way of thinking about this is to recognize that state lawmakers are obeying Parkinson's laws.

C. Northcote Parkinson, an oddball with an odd name, was a British novelist and historian whose output ranged from Napoleonic-era military fiction to a history of sea-borne trade. But his major claim to fame was Parkinson's Law (1957), which began a delightful series of books about how organizations make decisions, particularly bad ones. Here are some of Parkinson's best-known laws and how states are illustrating them:

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