State capitals are busy with lawmakers
working to eliminate red ink: 31 states must fill a combined $17.5
billion budget gap before June 30, according to the National
Conference of State Legislatures. Rather than encourage them to
reform their budgets and reduce costs, Senator Thomas Daschle
(D-SD) has proposed a $40 billion federal bailout to prop up state
spending. Because it would lead to higher federal taxes, this
bailout would not save taxpayers any money. Furthermore, it would
encourage the same overspending that created these crises. It would
be better to practice spending discipline and allow low taxes to
aid economic growth, which will in turn help balance state
budgets.
Reckless State
Spending
High spending, not low tax revenues, is to blame for state
budgetary crises. Between 1990 and 2000, inflation-adjusted state
tax revenues skyrocketed by 46 percent. Even following the "worst
fiscal conditions since World War II," tax revenues in 2003 remain
39 percent above 1990 levels. During that same period, however,
state general fund spending grew by over 50 percent. In 2000, total
state expenditures exceeded $1 trillion for the first time ever.
Then, when the 2001 recession forced belt-tightening in households
across America, states decided the time was right for their largest
spending increase in 12 years--8.3 percent.
States even outspent the federal
government, which increased inflation-adjusted spending by 29
percent since 1990--and that includes fighting a war. If state
governments in 1990 had committed themselves to growing no faster
than the federal government, they could have balanced their 2003
budgets and had enough money left over to reduce taxes by $525 per
household. Aligning new spending with the inflation rate would have
increased that tax relief fund to $1,372 per household. Instead,
states spent all of their new revenue and then some.
California exemplifies this mindset. State
lawmakers, blessed with a 28 percent increase in tax revenues
between 1999 and 2003, responded by hiking spending by 36
percent--turning a $10 billion budget surplus into a deficit. And
they still have not learned. When Governor Gray Davis announced a
$35 billion budget shortfall for 2003, his projection included not
just the cost of funding current programs, but also billions in
additional new spending. Not even the largest budget deficit in
state history has slowed the governor's appetite to expand
government.
Robbing Peter to
Pay...Peter
Sending federal aid to states would not save taxpayers a
dime because the same taxpayers who fund state budgets also fund
federal budgets. Like a family responding to unaffordable
MasterCard debt by running up the Visa instead, a federal bailout
would run up families' federal tax bill in order to reduce their
state tax bill--solving nothing.
Residents of fiscally responsible states
would be hurt the most. States like Wyoming, Michigan, and Colorado
generally resisted adding extravagant programs over the past
decade. Their shortfalls are therefore far smaller than those of
California and New York. Is it fair for California lawmakers to go
on a spending spree and then send the tab to Wyoming taxpayers, via
Congress?
Basic accountability demands that the unit
of government that spends the money should have to collect the
taxes. If state spending is financed by state taxes, elected
officials cannot spend beyond their constituents' willingness to be
taxed; but when states can simply withdraw whatever money they need
from the federal ATM, that incentive to weigh benefits against
costs vanishes.
States, just like the federal government,
waste billions on mismanaged and unnecessary programs. Deficits
provide states with a golden opportunity to examine their budgets
and reduce wasteful and ineffective spending, which will help them
keep taxes low and aid the economic recovery. It is time for states
to use their fiscal autonomy to seize control over their own
budgets.
Federal
Mandates
The one exception to state taxing and spending autonomy is
the unfunded mandates placed on them by Washington. The best way
for the federal government to help states would be to repeal the
mandates that micromanage state governments, or at least back them
up with the money to carry them out. Less federal meddling would
empower states once again to become innovative laboratories of
democracies.
This
was the idea behind the 1996 Unfunded Mandates Reform Act. The
Congressional Budget Office reported just two new major unfunded
mandates enacted in the first five years following UMRA, at a
collective new cost of just 0.1 percent of state budgets.
Accordingly, in May 2001, the Executive Director of the National
Governors' Association told Congress that UMRA had been largely a
success.
Then, as fast as state budgets collapsed,
media reports pointed to a new wave of unfunded mandates in
education, homeland security, election reform, and Medicaid. These
reports are overblown. A recent mandate to modernize states' voting
systems will likely be backed up with federal funds. Most new state
spending on homeland security was not mandated by Washington. It
was initiated by states that wisely made it a top priority.
Finally, state participation in the 2001 federal education reforms
and the new federal bioterrorism grants was made voluntary--meaning
states can opt out of the programs if federal funds do not cover
all costs. Very few unfunded mandates have been enacted in recent
years.
Medicaid, with costs split almost equally
between Washington and the states, is the most expensive unfunded
mandate. Washington deserves much of the blame for designing this
expensive and inefficient program. But much of the program's 165
percent increase since 1990 was caused by the states, which
expanded program eligibility and added new benefits in areas such
as weight-loss help and substance-abuse treatment. If some states
want to continue operating gold-plated Medicaid programs, they
should be willing to pay the higher costs themselves instead of
sending the bill to other states. Also, President Bush's budget
provides states with increased flexibility to seek more
cost-effective ways to provide Medicaid.
Conclusion
State governments have wisely concluded that their
constituents should be spared higher state taxes, but the bailout
solution would simply raise federal taxes instead. Taxpayers do not
care whether they mail their taxes to Washington or their state
capital; they care about their total tax burden and whether they
are getting their money's worth. Congress should forget accounting
gimmicks and cost shifting. It is time for all levels of government
to take responsibility for their budgets and reduce excessive
spending.
Brian M.
Riedl is Grover M. Hermann Fellow in Federal Budgetary
Affairs in the Thomas A. Roe Institute for Economic Policy Studies
at The Heritage Foundation.