Don’t Reward Profligate States with Bailouts

One of the problems with state balanced budget requirements is that tax revenues are very sensitive to economic conditions.

Boom Years: When there’s robust economic growth, politicians collect unanticipated revenue because more people have good jobs and more businesses are earning money.

And what do politicians do when this happens? They spend a big chunk of that unanticipated tax revenue.

Bust Years: When there’s a recession and tax revenues unexpectedly decline, state politicians are in a tough position because they’ve made lots of promises to spend money, including for the extra spending that took place when the economy was growing.

And what do politicians do when this happens? They usually respond with a combination of spending cuts and tax increases.

This boom-bust budgeting is unwise for many reasons, but I don’t like it because it leads to a long-run expansion in the size of government (the spending increases in the boom years almost always are greater than the cutbacks in the bust years).

Indeed, one of the reasons why I prefer a spending cap instead of a balanced budget requirement is that you avoid this “ratchet effect.”

Now let’s look at some real-time data on why this matters. Given what’s happened with the coronavirus, we’re currently in a “bust year” and many governors and state legislators claim that they’re dealing with special conditions that necessitate a bailout from Washington.

In a column for the Wall Street Journal, Jonathan Williams of the American Legislative Exchange Council and Dave Trabert of the Kansas Policy Institute explore the topic.

Many governors now seek a federal bailout, but borrowing trillions more will only make matters worse for taxpayers… Every state provides the same basic services, but some do it at much lower cost, which allows them to have lower taxes. ……high-spending states are at the front of the line for a federal bailout. …Too many elected officials would rather have taxpayers submit to a tax increase now, or pay off bailout debt later, than do the hard work of eliminating unnecessary spending.

Their column includes plenty of hard data showing that the states clamoring for the bailouts wouldn’t be facing any fiscal problems if they weren’t spending so much money.

…The 41 states with an income tax spent 55% more per resident in 2018 than did the nine states without an income tax. Florida, which doesn’t have an income tax, spent the least, at $2,327 per resident. Texas and New Hampshire, also without income taxes, have the next lowest spending at $2,585 and $2,773, respectively. New Hampshire is frugal enough to avoid a sales tax. …New York, which has an income tax, spends $5,231 per resident. Gov. Andrew Cuomo threatens to cut services unless he gets a $60 billion bailout over two years. If New York spent at Florida’s level per resident, the Empire State would save $56.7 billion each year. If Illinois Gov. Jay Pritzker were to trim his state’s per resident spending to match Texas’, he would save his taxpayers $22.3 billion a year—and there would be no need for any income-tax increase. Gov. Gavin Newsom could save Californians $64.6 billion annually if his state matched New Hampshire’s spending.

Here’s the map that accompanied the column, showing per-capita spending levels in each state.

Earlier this year, I looked at state data, but also included spending by local governments.

But slicing the numbers in a different way doesn’t change the fact that some states spend much more (and without delivering more and/or better services).

Some people portray this as a battle of red states vs. blue states, but I prefer to avoid the politics and simply compare big-spending states to modest-spending states. For instance, compare New York and Florida. If that’s not enough, also compare Texas and California.