Most states’ fiscal years are ending, accompanied by what is becoming an annual ritual – demands that Washington bail out state and local deficits. In 2008 and 2009, federal taxpayers covered for the featherbedding and corruption at the local level by awarding state and local governments a total of about $275 billion in bonus payments. Right now on Capitol Hill, state and local governments are demanding a fresh $50 billion round of bailout checks.
Set aside that when states refuse to pay their own bills, they hand the debt to federal taxpayers – all of whom live in states.
Set aside that the states’ claims they must be subsidized because “we are required by law to balance our budgets” is a total political fiction – more on that below. Set aside that governors refuse to make hard budget choices, demand bailouts for their states — then campaign by denouncing the big spenders in Washington.
The core issue is that Washington should not ship cash to states and localities at all, whether on a routine basis, as has been done for decades, or in the new form of special-pleading bailouts. The “laboratories of democracy” ought to pay their own ways. Sending the bill to Washington only encourages carelessness with money, indeed, can make fiscal negligence seem a virtue: when money falls from the sky, why not waste as much as possible locally? It is time to end the U.S. national bookkeeping swindle of having the federal government borrow money to hand to state and local governments to spend without restraint. State and local governments should obtain their own funds, via taxes or their own borrowing: this would increase accountability.
There are two types of federal transfers to states and localities: routine, and bailout. Over the last three years, Washington has handed nearly $2 trillion in regular payments to state and local governments, all funds obtained by borrowing. The $275 billion in bonus payments to states is atop the $2 trillion in routine funding. In fiscal 2010, states had about $1.3 trillion in revenue, about $400 billion of which came from the federal government either to help pay for federally mandated entitlements such as Medicaid, or to pay for local want-items such as roads and public transit, or simply as bailouts. That’s about a third of state funding being federal in origin. About 40 percent of local government revenue is direct-federal or a pass-along of federal money through a state, with roughly $300 billion in federal payments to various city, county and town governments in fiscal 2010.