February 4, 2003

February 4, 2003 | WebMemo on Federal Budget

Fact v. Fiction: State Spending

Fiction: State governments are facing a dire fiscal crisis and will have to cut general services, fire civil servants, and cut health care for the poor.The federal government should send cash to the states to prevent such drastic measures.

Fact: The federal government should not send money to state and local governments simply because they are run by fiscally irresponsible politicians. State government budget deficits do not represent actual spending and receipts; they represent planned spending and receipts.Since many states were planning to increase spending, these cuts in spending cannot represent a cut in existing services.

As a result of the robust economy in the 1990s, state tax revenues rose. Despite the economic downturn that followed, many state governments had planned their expenditures based on rising tax revenues.The resulting deficits, therefore, are a result of higher planned spending and lower planned receipts.

In fact, state and local governments almost always plan - and follow through with - spending increases.State and local government spending has grown steadily since 1944 and has grown faster than the rate of inflation since 1982.[1]State employment rose 0.6% and local government jobs rose by 1.4% in December 2002 while the number of private jobs decreased by 0.4%.

Consider these figures: From 1995 through September 2002, after accounting for all transfer payments (including welfare and unemployment insurance), state and local spending rose 5.9% per year.However, over the same period, receipts excluding all federal grants rose 4.5% per year.[2]Clearly, state and local officials have a history of over-extending their budgets.

It is true that rising Medicaid costs also attribute to state deficits, but this is a reason to reform the program, not to send more money to the states.One of the reasons that Medicaid's costs continue to rise is the system of federal matching funds.States have an incentive to spend more, even in the midst of an economic slowdown, out of the fear of losing federal funds.

The simple truth is that politicians are afraid to make the hard choices and decide which programs will not receive more money.As a consequence, elected officials try to scare people into voting for tax increases.Neither raising taxes nor sending more federal cash to states will force these officials to act responsibly.



[1] See Dennis Cauchon, " State, Local Spending Up Despite Downturn," USAToday.com

[2] See Gene Epstein, "The Meat-Cleaver Awards," Barrons, January 6, 2003, Pg. 30.

About the Author

Norbert J. Michel, Ph.D. Research Fellow in Financial Regulations
Thomas A. Roe Institute for Economic Policy Studies