Economics

A Hole They Dug for Themselves

There's nothing surprising about the crises in state budgets

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Everywhere you look, states are being crunched by fiscal emergencies that range from painful to excruciating. California, which has been paying bills with IOUs, is now preparing to close state parks and furlough state employees—which is what you have to do when your budget deficit is bigger than the entire budget of some states.

It's not alone. "At least 39 states have imposed cuts that hurt vulnerable residents," trumpeted a recent report from the liberal Center on Budget and Policy Priorities. California, New York, and Delaware have approved income-tax increases, and Pennsylvania and Illinois are considering doing likewise.

We all know the reason for the squeeze: An unexpected, severe national recession has dried up revenues just when states need funds to help out-of-work citizens. That's true: You would expect the worst downturn in decades to have a negative effect on tax collections. But it's a long way from the whole truth.

The crisis in state budgets is not an accident, and it wasn't unforeseeable. For years, most states have spent like there's no tomorrow, and now tomorrow is here. They bring to mind the lament of Mickey Mantle, who said, "If I knew I was going to live this long, I'd have taken better care of myself."

If they had known the revenue flood wasn't a permanent fact of life, governors and legislators might have prepared for drought. Instead, like overstretched homeowners, they took on obligations they could meet only in the best-case scenario—which is not what has come to pass.

Over the last decade, state budgets have expanded rapidly. We have had good times and bad times, including a recession in 2001, but according to the National Association of State Budget Officers, this will be the first year since 1983 that total state outlays have not increased.

The days of wine and roses have been affordable due to a cascade of tax revenue. In state after state, the government's take has ballooned. Overall, the average person's state tax burden has risen by 42 percent since 1999—nearly 50 percent beyond what the state would have needed just to keep spending constant, with allowances for inflation.

Even low-tax states like Texas and Nevada have followed the same course. No one has been inclined to say, "Taxpayers don't need to send us more money. We've got plenty."

All that growth should have been enough to pay for essential programs and furnish ample reserves, allowing state governments to weather a downturn without major adjustments. But the states put a priority on burning through all the cash they could get. Last year, they spent about 77 percent more than they did 10 years before.

California illustrates the problem. Adam Summers of the libertarian Reason Foundation in Los Angeles has calculated that if it "had simply limited its spending increases to the 4.38 percent average annual increase in the state's consumer price index and population growth each years since fiscal year 1990-91, the state would be sitting on a $15 billion budget surplus right now."

Illinois is another problem child. The state's general fund appropriation is some two-thirds higher today than it would be if the state had just kept those outlays in line with inflation over the last two decades. That increase, as in California, is the difference between a gaping deficit and a comfortable surplus.

Then there is New York. Last fall, Democratic Gov. David Paterson called for an end to the "unsustainable growth in state spending" in recent years. Since the mid-90s, he noted, the state budget has doubled, outstripping the inflation rate by nearly twofold. And New York was not exactly notorious for its frugality 15 years ago.

Unlike the federal government, states can't simply run deficits indefinitely. For that reason, they have a powerful duty to pile up surpluses during fat years, which would allow them to make up the revenue that goes missing during lean years. But for many lawmakers, the future extends only to the next election. So any money they have, they feel an insatiable need to lavish on someone.

Politicians are happy to blame the recession for depriving citizens of programs they have come to expect. The recession didn't create the gap between state government commitments and state government resources. It only exposed it.

COPYRIGHT 2009 CREATORS.COM

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  1. For that reason, they have a powerful duty to pile up surpluses during fat years…

    So we’re suggesting that states overtax during the good times? Governments that run surpluses are obviously taking more than they require for essential services, and that looks bad (or it should). To get rid of all that extra cash, they either need to tax less or give that money back in the form of spending on services and entitl-

    Oh, I think I see the problem.

  2. Sad part is, its only going to get worse!

    RT
    http://www.anon-web-tools.tk

  3. I love ya, Tomorrow!

  4. I recently saw an article in Time magazine about the budget crisis in California.

    As expected, the whole thing was about the evils of Prop 13.

    Not a single word about the state spending too much money.

  5. As expected, the whole thing was about the evils of Prop 13.

    The Community Reinvestment Act can’t be a cause of the housing bubble, because it was passed in 1977. Prop 13 is the cause of all of CA’s problems, despite being passed in 1978. What a difference a single year makes.

  6. As expected, the whole thing was about the evils of Prop 13

    If our current problem, that requires a New New New Deal, is people losing their homes, can even a liberal call higher property taxes a good thing?

  7. Perhaps the worst thing about piling up surpluses at the state level is that it creates an enormous slush fund that has to be “invested.” No possibility for favoritism and corruption there, eh?

  8. No possibility for favoritism and corruption there, eh?

    What you call “favoritism and corruption”, the annointed call “social justice”.

  9. “At least 39 states have imposed cuts that hurt vulnerable residents,”

    Does that mean they’ve already cut all the spending on non-vulnerable residents? … Oh.

  10. That image was screaming out for a good alt-tag. Get with the program.

    Caption contest!

    “After abandoning his previous rhetoric regarding fiscal responsibility, Gov. Schwarzenegger was forced to publicly eat a bowl of shit.”

  11. If they had known the revenue flood wasn’t a permanent fact of life, governors and legislators might have prepared for drought.

    You poor, deluded soul. No, legislators simply spend all they have right now as paybacks to the various groups (unions, lawyers, etc.) that got them elected. They have no concern for the future, and why should they when they can simply increase taxes?

  12. ‘Unlike the federal government, states can’t simply run deficits indefinitely.’

    Being the ignoramous that I am , I will need someone really smart to explain to me how being federal government allows one to run deficits indefinately. Being a national politician as opposed to the state/local level means you get to ignore the laws of economics? Zimbabwe tried printing money out of thin air until the suppliers of the paper to print the money on refused to sell them any.( lifes ironies can be sooooo sweet) Is that where we want to be?

  13. > … explain to me how being federal government allows one to run deficits indefinately.

    IANAE, but I’ll take a shot.
    A1. Because they can.
    A2. Because the whole is greater than the sum of the parts.

    Seriously, they can’t.

  14. When does CA start paying employees with all the confiscated POT they have (I hope they have it…you say they burned it???…Well yeah, how else are you suppose to enjoy it?…they burned it out in a field to keep people from enjoying it? WTF!!!! No wonder they’re in such bad shape…and cranky as well)

  15. I agree that the states have brought much of their ills upon themselves, and that they should have returned surpluses and taxed less during the good times.

    But could the federal government be at least partially to blame? During the time we’re talking about in this article, did the Feds pass any “unfunded mandates” along to the states?

    Just thinking.

    CrackerBarrel

  16. We keep on electing these people over and over again. Why?

    We know that Democrats and liberal Republicans are the ones who did this, yet we continue to re-elect them. Is the average American really that stupid? Do we not grasp the concepts at play?

    I still think that Illinois should just kick Chicago out. Chi-town can keep Rockford and maybe Joliet. The rest of us in downstate and nw Illinois would be much happier. Hell, Chicago already thinks they are their own state, why not make it official? Then they won’t have to worry about us dumb rednecks hindering their attempts at a liberal utopia.

  17. @doubled

    Any government which institutes a fiat currency system (the USA for example, but none of the 50 states) must, on an ongoing basis and on average, run a budget deficit (surpluses will be rare, as they are deflationary) in order to keep the money supply growing to keep pace with economic growth. In principle, this is a much better system than, for example, trying to expand the gold supply at a rate necessary to keep pace with economic growth. No nation with a fiat currency can go bankrupt (there is no solvency problem), as the money is essentially minted out of thin air, and is given value by its suitability for paying income taxes imposed by that government (which are also necessary for a fiat currency system).

    Thus, the federal government has a very powerful tool at its disposal to fight recessions and to deal with sudden need (in emergencies for example) to increase spending.

    States, however, do not issue fiat currency (although some have argued that’s exactly what California did when it began issuing IOUs), and so do not have this powerful tool at their disposal.

    It’s especially unfair and unjust, in my view, that the federal govt, which issues currency, can force unfunded mandates on states which cannot. The states have no choice but to cut spending, or raise taxes.

  18. Printing worthless money is actually the quickest way to go bankrupt. You might call it ‘open revolt,’ if you like, but it sure looks like bankruptcy to me: the state has no ability to purchase goods or services, and its attempts to do so make the problem worse.

  19. Article I section 10

    “No state shall… accept any Thing but gold and silver as tender in payment of debts… or emit bills of credit”

    Well, duh. This is what happens when you don’t follow the constitution.

  20. The states spending binge, especially in the blue states, puts lie to the claim that leftists merely follow Keynesian principles. If they did, they would pile up surpluses and/or pay off bonds during good times so they could have or borrow money in times of bad. Instead, they just tax all the can and spend all they can when they can.

    Public choice theory explains this neatly. Politicians benefit personally from spending so they spend as much as possible. Everything else is rationalization.

  21. Did our good friends and betters at Time mention this?:
    http://www.chuckdevore.com/blog.asp?artid=94

    Thanks God for professional journalists!!!

  22. Aaaaargh now I’m mad-
    Prop. 13 is the only thing that has kept our representatives from taxing our veterans out of their homes to give even more money to illegal aliens.

  23. I was surprised to see the inclusion of Texas in this article. It doesn’t fit my experience. Texas has no personal or corporate income tax. I’ve received state refunds on my company unemployment tax the last two years because costs were lower than expected. There was a poorly formulated franchise tax, but after company owners complained, the legislature corrected the problem. – and Texas has a nine billion dollar surplus…

  24. In addition to the “liberal ratchet”-the idea that once a government program is established it is near impossible to disestablish it-there is the moral hazard issue, the implicit belief that if government overspends it can always fall back on raising ever more taxes. What’s interesting about California and the other states that are at the forefront of this phenomenon, is that they have arrived at the tipping point. While the federal government can print money and hold huge deficits, states operate under greater fiscal constraints. That public employee labor unions are using legal means to lock in their gold-plated contracts is a powerful indication of the motivation they have to counter the “tipping point” forces now presenting themselves and threatening their economic advantages gained through rent-seeking and moral hazard.

  25. My only point is that if you take the Bible straight, as I’m sure many of Reasons readers do, you will see a lot of the Old Testament stuff as absolutely insane. Even some cursory knowledge of Hebrew and doing some mathematics and logic will tell you that you really won’t get the full deal by just doing regular skill english reading for those books. In other words, there’s more to the books of the Bible than most will ever grasp. I’m not concerned that Mr. Crumb will go to hell or anything crazy like that! It’s just that he, like many types of religionists, seems to take it literally, take it straight…the Bible’s books were not written by straight laced divinity students in 3 piece suits who white wash religious beliefs as if God made them with clothes on…the Bible’s books were written by people with very different mindsets…in order to really get the Books of the Bible, you have to cultivate such a mindset, it’s literally a labyrinth, that’s no joke

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