It's pretty common knowledge by now that many states are drowning in red ink. Most notably, the weak economy has created operating gaps ranging from the hundreds of millions of dollars in Arizona to the tens of billions in California, Illinois, and New Jersey.
Deep cuts in public spending have become the order of the day, some executed with more care than others, and although political rhetoric presents an obstacle, some leaders are contemplating whether to raise taxes, as Illinois did recently.
And yet, that's just part of the deficits problem. Bad as this situation is, this year's difficulties are arguably one of the lesser aspects of a longer-term, public finance crisis in the states that actually won't improve, like the short-term one will, as the economy recovers.
How is that? A new report recently released by my group at Brookings Mountain West, working in partnership with the University of Tennessee economist Matt Murray and Morrison Institute of Public Policy at Arizona State University, lays out the problem, focusing on California and in the Intermountain West.
On the one hand, the large "cyclical" deficits most states are grappling with represent the temporary fallout of the Great Recession These shortfalls are daunting but will pass once the picks up. In that sense, these gaps of hundreds of billions of dollars are the easier part the problem.
The hard part; because they are more entrenched, are what we call "structural" deficits -- the more or less permanent imbalances of revenues and expenditures arising from flaws in a state's fiscal structure, fundamental changes in the regional economy or the state's demographics, or, especially, imprudent or shortsighted policy choices.
In Arizona, this sort of structural shortfall now adds up to a cool $2.1 billion -- a chilling 21 percent of stable general fund expenditures. In California, the figure is about $9.2 billion -- about 9 percent of stable expenditures. And these figures leave aside such other long-term challenges like pension obligations and retiree health insurance.
How do these structural problems arise and what needs to be done about them? The contrasting messes in California and Arizona -- two of the Western states we studied in our report--display in extreme versions the kinds of rashness and imprudence that have gotten so many states in trouble.
California's budget problems show how overly-optimistic spending, combined with voter mandates and institutional constraints (with none of it linked together), can lead to calamity. There, a proposition directing half of all new revenue to schools has combined with multiple state and local voter-approved limits on taxing and revenue raising to produce a train-wreck.
Arizona's fiscal problems demonstrate, meanwhile, how a single-minded emphasis on tax-cutting combined with California-style voter mandates and institutional constraints can also lead to a crack up. Arizona basically gave away the store in better times by handing out an inflation-adjusted $2.9 billion in ill-advised tax cuts over some 15 years unaccompanied by spending cuts. Major new education and Medicaid expansions in the last decade added to the problem, but for the most part a fiscal disaster resulted from the combination of massive tax cuts, voter mandates and a super-majority requirement for any revenue increase.
The long-predicted result: The Arizona general fund is now short some $3.4 billion, or a full 33 percent of the needed total, for FY 2011 with fully two-thirds of that amount associated with the state's permanent structural gap.
The bottom line: Arizona and California, notwithstanding their contrasting political tilts, each ran into the ditch by combining rash, basically optimistic spending and tax decisions in good times with rigidity and narrowness all along. In each place, moreover, the basic need to constantly compare spending and revenue-raising broke down thanks to ideological fixity, a loss of consensus, and the recourse to voter mandates.
So what should these and similarly afflicted other states like Illinois and New Jersey do? States need to break with business-as-usual in three fundamental ways.
First, they will need to take unprecedented steps to close gaps--and the sooner the better. Austere states will need to add revenue increases to the mix while profligate ones will need to discipline spending.
Second, states need to broaden, balance, and diversify their revenue bases while looking to the long-haul balance of taxing and spending. Over-reliance on narrow bases won't cut it now.
And third, states need to improve the information sharing and budgeting processes.
And yet, to achieve any of this, there is one other requirement: States are going to need to reject conventional dynamics. They need to reconstruct the integrity of their budget process, make it harder for interest groups to pass budget-blowing measures that undermine sound fiscal policy, and get beyond ideological warfare to foster more collaboration.
The choice couldn't be more clear. States need to make the sound policy decisions necessary to putting their fiscal house back in order, or prolong over many years a world of hurt.
Mark Muro is the co-director of Brookings Mountain West and a senior fellow at the Metropolitan Policy Program at Brookings. He is a co-author of "Structurally Unsound: Cyclical and Structural Deficits in California and the Intermountain West," a co-production of Brookings Mountain West and the Morrison Institute for Public Policy at Arizona State University.
Guess which States are the Takers and which States are the Givers?
80% of the States that receive MORE tax dollars then they pay in are "RED States"
The "Donors"? BLUE States.
Why do Red States get more then they Give to manage their States? Because they are economically poorer States.
Yet...it is those RED States who have the angriest people...Tea Party, extremist right Conservative folk and their Republican Senators and Representatives, who are screaming about the "Federal" Government spending more tax dollars then it takes in, and who are demanding a balanced "Federal" budget, and who protest about the s0-called "Socialist" Democrats expecting "others' to pay their way.
States accepting more Federal tax dollars then they contribute? Just a few examples:
Mississippi: receives "$1.84" back for every $1.00 it contributes to Federal Government Revenues.
Alaska: $1.82
West Virginia: $1.74
Alabama: $1.61
South Dakota: $1.59
Arkansas: $1. 53
Why don't Conservative "States" balance their own STATE budgets and live within their means, instead of expecting the redistribution of wealth to them, by the Federal Government, from tax revenues from OTHER States?
Don't Conservatives call that SOCIALISM?
On a grander scale, why not repeal the 17th amendment and go back to state legislatures selecting their own senators? As it stands now, the states themselves have no representation in Congress, since electing Senators by popular vote makes them beholden to the citizenry and not the states.
As an example, what senator will vote against an entitlement that benefits his constituency, even if that entitlement imposes severe budget problems on the state he represents? He gains political points with his electorate, at the same time he burdens them with costs that state tax coffers, and the very electorate he serves, must ultimately fund!
Nor does it address the hypocrisy of those Conservatives having the gall to call Democrats Socialists, while those same Conservatives hold out their Conservative little hands for Federal money they haven't contributed to, from the tax revenues from other States.
The answer to your last question....
A Senator that isn't a royal hypocrite...which he is IF he is calling others Socialists, or is complaining about "Federal Government spending" while HE/SHE is doing the spending.
The problem is ideology, putting partisan politics ahead of the people that voted them into office.
Colorado...........................
Republican members of the JBC voted unanimously to eliminate funding of $125,000 to provide breakfast to children that came to school hungry. 30 cents per child per day. The reasoning? "The State is in a financial bind, and we simply can't afford it"
Same day, same room, same members of the JBC voted to extend tax breaks to the largest Workers Comp Insurer in the State. Tax breaks amounting to 3 million dollars a year. The management of that company recently was chastised for spending $318,000 for a 5 day golf junket for top management and board members. Nearly three times what "we can't afford" for hungry children was wasted in 5 days of executive perks.
Colorado doesn't suffer so much from a shortage of money, as it does from a shortage of reason, or of ethics. The mathematics of this equation just plain doesn't add up. Not unless there are things going on behind closed doors that the public isn't aware of.
Representative government means representing the majority of the voters, not the special interests, and their campaign contributions. At least that was the intent. It's not the money, it's how it's spent, and why.
http://www.gallup.com/poll/145922/Gallup-Finds-Unemployment-Slightly-January.aspx
PRINCETON, NJ -- Unemployment, as measured by Gallup without seasonal adjustment, increased to 9.8% at the end of January -- up from 9.6% at the end of December, but down from 10.9% a year ago.
Translation: Forget this crap about taxing the rich. It doesn't work, never has, and never will. The rich have more abilities to avoid paying taxes than anyone else. If you are going to solve the spending problem, everyone has to have skin in the game. The rich, the middle class, the poor.
Everybody needs to know that they will be paying personally for any expansion of government.
Reagan was a supply-sider, and as all good supply-siders know, you must cut marginal tax rates AND spending to avoid deficits.
Nonetheless, his tax cuts helped usher in 20 years of prosperity, the likes of which this nation had never seen before.
In California and Oregon there is a constant barrage of misleading ballot measures aimed at increasing expenditures and decreasing revenues. Something has to be done to stop them...
That is an OUTSTANDING solution and one I've always supported. I've always thought that we ought to just pass an amendment to the constitution that simply voids our national debt. In one bold stroke we could erase over $14 Trillion of red ink from our balance sheet and guarantee we would never have a budget deficit again, because never again would anyone loan us the money to allow us to go in the red.
Nothing else could possibly stop the growth of government as fast as reneging on our bonds....
That's if you default at the federal level, since retirement plans have no need to own tax-advantaged state and local bonds. As for state and local debt, however, who do you think holds most of the $480 billion in state and muni mutual funds in the US? Millionaires are not investing in mutual funds - they hold bonds in separate, personal accounts. So expect that some pretty ordinary folk are going to get hammered if state and local governments default.
Don't worry so much about how the "elites" will be affected. Your "easy and obvious" solution to government debt wil have some "easy and obvious" impacts on the average citizen, and they are all disastrously negative. But thanks for your insights.