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 With tax revenues plunging and federal “stimulus” dollars eventually coming to an end, states are facing increasingly urgent budget crises that promise to deliver historic showdowns across the nation. America is at a crossroad. And as the situation becomes more serious, at least one governor is warning that “the time to plan and debate is now” because “the real world is about to arrive.”
The economic crisis has already created massive problems for the governments of the several states, especially bigger-government ones like California, which was dealing with an estimated deficit of $42 billion this year. As part of the “solution,” it eventually turned to issuing IOUs and raising taxes. The National Governors Association recently estimated that the nationwide budget deficits for state governments could exceed $230 billion through 2010. And it is only getting worse.
“State government finances are a wreck,” wrote Republican Indiana governor Mitch Daniels in a column printed by the Wall Street Journal entitled ‘The Coming Reset in State Government — My fellow governors and I are likely facing a permanent reduction in tax revenue.’ He noted in the introduction that the plunge in tax receipts is the worst in 50 years and that three-fourths of states have deficits greater than 10 percent of their budgets.
“Only an emergency infusion of printed federal funny money is keeping most state boats afloat right now,” Daniels continued. But eventually these funds will dry up, and only unfunded mandates from the federal government will remain — yet another dilemma for “cash-starved” bloated states.
According to the piece, state government spending has ballooned by an average of 6 percent every year over the last decade — 8 percent between 2007 and 2008. Daniels argues that the “near permanent reduction in state tax revenues” is going to require shrinking the size and scope of government. He also blasted Obama’s taxing and spending policies, saying that they seemed designed to prevent an economic recovery while ominously predicting that it would take a long time for revenues to return to previous trends — “if they ever do.”
“After crunching the numbers, my team has estimated that it would take GDP growth of at least twice the historical average to return state tax revenues to their previous long-term trend line by 2012,” Daniels said, adding that he doubted even that would be enough to rescue most states. This at a time when the economy is continuing to contract and talks of green shoots seem as absurd as Federal Reserve chairman Ben Bernanke’s predictions before the crisis “officially” began.
The budget woes have already led over half of the states to raise taxes. Many more have proposals to do the same — despite the well-known economic consequences, which once again will only serve to make the financial implosion even more severe. But there is a positive side too. As Daniels notes, many taxpayers and productive enterprises are mobile.
“The ‘progressive’ states that built their enormous public burdens by soaking the wealthy will hit the wall first and hardest,” he said, noting that individuals and businesses are already “fleeing” such governments for “the open arms of states like Indiana.” According to Daniels, his state is seeing an influx of businesses seeking a more “low-cost, enterprise-friendly environment.” If this continues, states may begin to notice and respond accordingly.
Officials in some state capitols are probably not thinking about these issues yet, Daniels said. But they will be. “State governments will soon have to choose between a major downsizing or consigning themselves to permanent decline. Wishing for an improbably huge boom while chasing your own tail through self-destructive taxes won't prove much of a strategy.”
States like Florida are already experiencing the effects of the counter-productive policies like tax increases. People are emigrating in record numbers, further depressing real-estate prices while the state’s economy continues to crumble. Municipalities in the state are aggravating and perpetuating the problem, with just the city of Miami’s over-grown government facing a deficit of close to half-a-billion dollars as its leader hands out raises and residents continue to pack up and leave. Future pension liabilities promise to make state and local government finance fiascos into an even bigger monster very soon.
However almost unbelievably, instead of cutting and cutting, government at all levels is continuing to expand in many cases. The New York Times reported that just since the economic crisis began, state and local governments have added a net of over 100,000 new workers to their payrolls. The federal government is looking for another 600,000 for Obama’s first term alone.
But as Daniels points out: “Unlike the federal government, states cannot deny reality by borrowing without limit. The Obama administration's "stimulus" package in effect shared the use of Uncle Sam's printing press for two years.” And that money will be gone soon, so “[e]ven if Congress goes for a second round of stimulus funding, driven by the political panic of bankrupt Democratic governors, it would only postpone the reckoning.” He highlighted the fact that “Washington, as long as our Chinese lenders enable it, can practice denial for a while longer.” But for the states, the jig is up. Reality is about to set in.
Some governors want to “restructure” government in the hopes that it will help plug the massive gap between revenues and expenses. Oregon Governor Ted Kulongoski just ordered the creation of a “Reset Cabinet” to “consolidate” and “maximize efficiency,” among other things. But it is going to take a lot more than that.
Governments are eventually going to have to deal with the same situation that Americans are currently dealing with — less money must mean less spending. However the real problem is not that state governments will have less money, it is that citizens allowed bureaucracies and budgets to become so massively bloated in the first place.
Federal mandates on the states are unconstitutional and should be promptly done away with. So should the means of enforcing compliance — federal taxpayer handouts with strings attached. The government’s role should consist of protecting life, liberty, and property. Nanny-states only lead to irresponsibility, lower quality of life, higher taxes, and less productivity.
These giant budget shortfalls could translate into a real opportunity for reducing the cost and scope of all levels of government — maybe permanently. But if concerned citizens fail to pressure their representatives, it could also mean more taxes and “fees,” less freedom, and a correspondingly weaker economy up until total state and national bankruptcy. It is up to tax payers to make sure politicians make the right choice.
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