How States Fail (Fiscally)

Good, long, and detailed account from The World magazine of some of the specifics of how American states fail and succeed with their budget and tax policies in maintaining some level of fiscal solvency. As should be no big surprise to Reason readers, taxing and spending are not really good ideas if balancing budgets is the goal.

The story focuses on Virginia and Maryland, New York and New Jersey, Indiana and Illinois, and Arizona and California. It  is full of tales of hungry unions, hapless governors, short-term accounting tricks, and in general governments whose long-term stability depends on keeping spending under control–even as federal policy discourages them from doing so. For example:

One of the biggest obstacles Arizona (and by extension every cash-strapped state) faces in solving budget problems is the federal government.

Though the federal healthcare bill was not signed until after Arizona's 2010-2011 budget was finalized, the new regulations it imposes will strip the state of federal healthcare funding if it attempts to carry out the Medicaid cuts outlined in the new budget. This requirement, known as "maintenance of effort," has prompted Brewer to push for Arizona to join other states in bringing a lawsuit against the federal healthcare overhaul. Martin says that the new federal legislation may make many of the state-level debates on how to cover the shortfall moot: "The healthcare mandate blows a billion-dollar hole in our budget."

Similar federal regulations are in place to deprive states of matching funds if they try to cut spending on education. The fact that the two areas covered by maintenance of effort—education and healthcare spending—also happen to be every state budget's biggest expenditures puts states even more squarely between rocks and hard places. But soon, Schlomach warns, it may not matter what the administration mandates: "Quite frankly, we're at a point where we can't afford to spend enough to get the federal money."

Read early and often this May 2009 Reason magazine classic on why state's budget problems are a result of state spending binges.