Politics & Policy

Say No to Bailouts

The federal government can't help our over-spending states.

In 31 states, legislatures are working to close a combined budget gap of $17.5 billion. What created these crises? Overspending. Even after two years of what many call “the worst fiscal crisis since World War II,” state tax revenues are up almost 40% over 1990 levels. Yet state general-fund spending is up 50%. The total amount spent by state governments topped $1 trillion for the first time ever in 2000 and has continued to rise.

Sounds like a good opportunity for these states to reign in the runaway spending that’s plunged their budgets into the red. Senate Minority Leader Thomas Daschle apparently disagrees.

He proposes a $40 billion federal bailout of the states. But since the same taxpayers who fund state budgets also fund federal budgets, this would hardly help. Like a family responding to unaffordable Mastercard debt by running up the Visa instead, a federal bailout would run up the federal tax bill for families in order to reduce the state tax bill. You’ve solved nothing.

Worse, Sen. Daschle’s plan does not encourage states to live within their means. When the economy fell into recession in 2001, families nationwide tightened their belts. States, meanwhile, grew their budgets by 8.3% — the largest one-year spending jump in over a decade.

Federal spending has grown 29% since 1990, but state spending has grown even faster. Had state lawmakers exercised as much restraint as the federal government, they could have balanced their 2003 budgets and had enough money left to cut taxes by $525 per household. Keeping new spending in line 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. Blessed with a 28% increase in tax revenues between 1999 and 2003, Golden State lawmakers responded by hiking spending by 36% — turning a $10 billion budget surplus into a deficit. And they still haven’t learned. When Gov. 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 his appetite to expand government.

Meanwhile, a handful of states such as Wyoming, Michigan, and Colorado generally resisted adding extravagant programs over the past decade. As a result, their shortfalls are far smaller than those of, say, California and New York. Is it fair for California lawmakers to go on a spending binge 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 shouldn’t be able to spend beyond their constituents’ willingness to be taxed. Yet when states can simply withdraw whatever money they need from the federal ATM, the incentive to weigh benefits against costs vanishes.

Some state lawmakers say accountability means Washington should remove the “unfunded mandates” that require them to spend some of their tax dollars on Washington’s priorities. They’re right. But the mandates enacted since 1996 account for less than 1% of state budgets, so they can’t be blamed for the recent state spending spree. Besides, many of the recent “mandates” in education and homeland security aren’t mandates at all; state participation is voluntary, meaning they can opt out if federal funds don’t cover all costs.

Granted, the largest unfunded mandate — Medicaid — isn’t voluntary. States must split their Medicaid program costs with Washington, and those costs have soared 165% since 1990. While Washington deserves much of the blame for designing such an expensive and inefficient program, much of the recent increase was driven by states that expanded eligibility and offered new benefits, such as weight-loss and substance-abuse treatment. States that want to continue operating gold-plated Medicaid programs should be willing to foot the bill themselves rather than expect out-of-state taxpayers to pick up the tab.

Spending restraint never comes easily. It demands leadership and discipline. And it’s not achieved by shifting the cost of government from one level to another. Indeed, bailouts can only exacerbate the real problem: that too many politicians spend every dollar they’re entrusted with — and then ask for more.

— Brian M. Riedl is the Grover M. Hermann fellow in federal budgetary affairs in the Roe Institute for Economic Policy Studies at The Heritage Foundation.


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