States Should Say ‘No Thanks’ To Federal Bailout
A growing chorus of governors is calling on Congress to “bail out” state governments. Governor of Maryland Larry Hogan and Governor of New York Andrew CuomoAndrew Cuomo Photos of the week: Afghan evacuees, Paralympic Games and French firefighters Poll: Voters support Cuomo’s impeachment despite resignation Time’s Up CEO resigns amid Cuomo scandal MORE posted a joint statement over the weekend, asking for an additional $ 500 billion in federal funds for the states.
“We must be allowed to use any state stabilization funds to replace lost revenue, and these funds should not be tied solely to expenses related to COVID-19,” the governors wrote.
Their advocacy follows the $ 2 trillion CARES law, which included general law 150 billion dollars COVID-19 Relief Fund, $ 30 billion fund for education costs, $ 45 billion fund for disaster relief and more for state and local governments. Yet economic conditions across the country remain dire due to government-imposed closures. States seeking even more money from Congress should think twice.
History suggests that federal bailouts are not a “free lunch” for states. They diminish state sovereignty, encourage future fiscal irresponsibility, and create a moral hazard problem. Bailouts reward fiscally reckless states at the expense of fiscally responsible ones. Academic research from the Mercatus Center at George Mason University shows that federal bailouts could even lead to higher state taxes. Research shows every dollar in federal aid to states raises state taxes from 33 to 42 cents.
During the 2009 debate on the Obama-era American Recovery and Reinvestment Act (ARRA), states were warned that conditions attached to federal dollars, such as maintaining effort requirements, would be much more expensive than “ready-to-start projects”. At the time, the national debt was approximately $ 10 trillion. Now, just exceeded $ 24 trillion, it is essential to examine the sustainability of additional bailouts.
With these threats in mind, states like Utah and Idaho have wisely implemented Finance loan Strategies. These policies require state agencies to monitor dependence on federal dollars, develop a contingency plan in the event federal funds are depleted, and examine harmful terms attached to federal aid.
But who are the big government politicians really here? Every time you send a rescue plan to one group, another group has to foot the bill. In this case, these groups are in fact one and the same: State taxpayers are also federal taxpayers. In short, to bail out states with federal taxpayer money is like using your American Express card to pay off your Visa card.
Make no mistake about it: state and local governments have no shortage of revenue. They lack control over spending. Over the past 40 years, after taking full account of population growth and inflation, the direct general expenditure of states and local authorities increased 88 percent. Despite one of the longest economic booms in American history, states also continued to accumulate unfunded public debt and pension obligations.
ALEC Center for State Fiscal Reform Research reveals bond debt for all 50 states totaled nearly $ 1.16 trillion in 2019, unfunded public pension liabilities totaled nearly $ 5,000 billion, while other post-employment benefit obligations (OPEBs) for retired public sector employees increased An additional $ 1 trillion in unfunded liabilities. These are all future expenses that have been promised but not funded.
Hundreds of billions of dollars in federal aid would allow states to continue this cycle of debt and spending. It would also send the wrong message to states that have made difficult spending choices and practiced fiscal discipline.
For example, North Carolina dramatically lowered its personal and corporate income tax rates and created an empty rainy day fund for $ 1.17 billion that the economy has prospered over the past decade. In addition, the economic growth produced while reducing tax rates has allowed lawmakers in North Carolina to accumulate a balance of $ 3.9 billion in the Unemployment Trust Fund, after paying off over $ 3 billion in debt. On the other end of the spectrum, the Illinois rainy day fund would only keep running state for about 15 minutes. Illinois State Debt Stands Over $ 486 Billion ($ 38,000 Per Resident) – equal to 56% of the state’s GDP.
Rather than asking Congress for a $ 500 billion bailout, pass spending reforms like priority-based budgeting – which eliminates redundancy and increases accountability to taxpayers – is key.
In 2002, Washington State adopted this approach and closed $ 2.5 billion budget gap without raising taxes under the leadership of Democratic Governor Gary Locke and a bipartisan group of lawmakers. To do this, they identified the core functions of government and ranked the spending needs of agencies and programs from top to bottom until they spent the disposable income.
This level of fiscal discipline is not easy to achieve, but it is exactly what taxpayers deserve. As American families and businesses make their own financial sacrifices to survive the COVID-19 economy, state policymakers must re-prioritize spending and avoid the temptation to fall into a cycle of federal dependency.
Jonathan Williams is executive vice president of policy and chief economist at the American Legislative Exchange Council. Follow him on Twitter @taxeconomist. Lee Schalk is the senior director of the Center for State Fiscal Reform at the American Legislative Exchange Council.