June 17, 2010


*“We need additional federal relief because our state constitution requires a balanced budget.” Governors often say this as a way of rationalizing giveaway demands. In effect they are saying – because my rules forbid me to be responsible for my bills, you must pay for me. I think I’ll try this argument with the waiter next time I’m out to dinner!

*Unlike the U.S. Constitution, which is structured to be hard to amend, state constitutions are a snap to alter. The Texas state constitution has been amended 467 times, the Maryland constitution amended 198 times – versus 27 amendments for the U.S. constitution. In many states, a simple vote of the legislature amends the state constitution. Because of this, most states could amend their constitutions to drop budget-balancing. It’s just that states don’t want to, because pretending their constitutions are etched on stone tablets and cannot be altered is a way of shifting the burden to the federal level – as well as exempting  governors from criticism for deficit spending.

*Many state and local governments already borrow using municipal bonds and the new Build America Bonds, which are federally subsidized. Steven Malanga reports in the City Journal that muni bond debt has increased from $1.7 trillion in 2000 (stated in today’s dollars) to $2.2 trillion today. So if borrowing your way out of difficulties is smart – this is what local governments tell Washington when they demand extra money – why don’t state and local governments do their own borrowing, and make their own repayments?

*There’s a strong argument that well-to-do parts of the country should assist low-income states such as Alabama, Mississippi and West Virginia. But the last few years of the bailout-a-rama have not been structured as progressive income redistribution. Instead, big federal checks have gone to California, New York, New Jersey and other prosperous states, while boom towns such as Austin and Seattle get funny-money obtained by adding to the federal debt. The billions in recent bailout money to state and local governments has been doled out roughly in proportion to population, not according to need or merit. Here, Julie Creswell reports fully a third of the Build America Bonds subsidy has gone to California and New York.

*Many states are in poor fiscal shape because they’ve cut property taxes, the bête noir of senior-citizen lobbies, while raising top-rate income taxes, which most seniors don’t care about. California has the nation’s worst budget mess, and barely taxes real estate, while imposing a whopping 10.5 percent top rate on income. Since 1972, property taxes have declined to 16 percent from 26 percent of state revenues, as a succession of candidates in multiple states has appealed to seniors – the most reliable voting bloc – by cutting or limiting property taxes.

*The problem is that while property can’t move, income can. California keeps jacking up its income-tax top rate – voters love to hear the rich are being soaked! – only to see tax revenues falter. This is because the rich are not, in fact, being soaked: they are using various ploys to shift their economic activity into low-tax states, while their California property remains in California, taxed lightly if at all. Texas has no state income tax, yet is in better financial shape than California. This isn’t a mystery; Texas taxes property. A California governor with political courage would tell constituents the Golden State needs to raise property taxes while cutting income taxes. It is a lot easier to call on the federal government for special handouts.

*Appealing last weekend in his Saturday radio address for the $50 billion bonus to state and local governments, President Obama said the alternative was “massive layoffs of teachers, police and firefighters.” This is what Charles Peters, founder of the Washington Monthly, memorably called the Firemen First principle of budget politics. All levels of government are overstaffed with sclerotic middle managers who exist to file grievances against each other, and with senior paper-pushers possessing no meaningful responsibilities. But politicians never threaten to lay off the thousands of facilitation specialists and deputy assistant associate administrators. Politicians threaten to lay off those who actually do something – teachers, police and firemen. Fire the Firemen First!

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