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Tuesday, April 14, 2009

State Spending Binges

The latest Reason Magazine has a fine article on why state governments needed a bailout and why they will again - overspending. 

In 2002 the National Governors Association issued a press release saying the “states face the most dire fiscal situation since World War II.” In 1990 The New York Times reported that states and cities faced a “fiscal calamity.” Fire up Google, pick almost any year, and you’ll find plenty of stories about a “fiscal crisis” around the nation. 

For decades statehouses have followed a predictable schedule. In good economic times, they collect a lot more tax revenue than they really need. But instead of giving the money back to taxpayers or putting it in a rainy day fund, they pretend the good times will never end. When the good times do inevitably come to a close, governors plead poverty and either ask the federal government for help or raise taxes on their beleaguered citizens. Eventually, the economy rebounds and the vicious cycle starts again.

In the five years between 2002 and 2007, combined state general-fund revenue increased twice as fast as the rate of inflation, producing an excess $600 billion. If legislatures had chosen to be responsible, they could have maintained all current state services, increased spending to compensate for inflation and population growth, and still enacted a $500 billion tax cut. 

Instead, lawmakers spent the windfall. From 2002 to 2007, overall spending rose 50 percent faster than inflation. Education spending increased almost 70 percent faster than inflation, even though the relative school-age population was falling. Medicaid and salaries for state workers rose almost twice as fast as inflation. ...

Let’s put this another way. After 2007 we were clearly experiencing an economic downturn. If the states had merely maintained their existing programs between economic downturns, they would have been able to deliver a $2 trillion tax cut at the end of 2007. Imagine the impact that might have had.
 The same is certainly true in Pennsylvania where, as Matt Brouillette will be testifying to today, Pennsylvania would be on sounder fiscal and economic footing, if only Gov. Rendell and state lawmakers had kept spending in check.  As we pointed out in February
Had Gov. Rendell and the General Assembly simply held spending growth over the last six years to inflation and population growth (19.8%), Pennsylvania would be looking at a minimum surplus of $3.8 billion rather than drowning in red ink.  Additionally, $15.9 billion could have been returned to the taxpayers—that's more than $5,000 for every family of four.

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