Don’t Look to Uncle Sam for Help

aei_reportby James A. Bacon

One of the reasons I’m so pessimistic about the long-term fiscal health of state and local governments is that they rely so much on federal funding to sustain ongoing operations. The perilous state of affairs is highlighted in a new American Enterprise Institute (AEI) report, “State and Local Spending: Do Tax and Expenditure Limits Work?”

The main thesis of the report is that Tax and Expenditure Limits (TELs), a mechanism often favored by conservatives to control the growth of government, do not work. That argument, by the way, is worth a blog post in its own right.  Fiscal conservatives in Virginia often have floated the idea of limiting the growth in state spending to the rate of inflation plus population growth. I’ve always had reservations about the idea — for the very reasons that AEI points out. Such a cap would be a mechanical solution that would not address underlying fiscal pressures. Politicians would be sorely tempted to engage in all manner of accounting skulduggery in order to live within the cap. I’m not the least bit surprised that author Benjamin Zycher concludes, after analyzing 30 states that have tried TELs, that “the ineffectiveness of TELs is unambiguous.”

Capping expenditures does not solve underlying problems like the exploding pension burden, high and rising Medicaid expenditures or the ballooning cost of K-12 or higher education, all of which require micro-level surgery to fix, not a blunt hammer.

One challenge facing state and local governments is their increasing reliance upon the federal government during a time of increasing fiscal austerity. I emphasize this finding in the AEI report because it buttresses my argument to state and local officials in Virginia that things ain’t likely to get any easier. As can be seen in the graph below, federal transfers as a percentage of total state and local outlays have increased pretty steadily since 1986.

federal_dependency

Some of that increase can be attributed to the soaring cost of financing the Medicaid program. State governments depend upon Uncle Sam for more than half their Medicaid expenditures.

It is highly improbable that federal generosity to state and local governments can continue on the same trajectory of the past 16 or 17 years. Indeed, it is far more likely, given the expansion of entitlement spending, crowding out of discretionary spending and challenge of managing a $17 trillion national debt, that the federal government will be forced to curtail non-Medicaid aid to states and localities in future.

Here’s what the feds contributed to states and localities in 2011:

General public service               $2.5 billion
National defense                           4.1 billion
Public order and safety                7.1 billion
Economic affairs                         19.6 billion
Housing and comm. affairs      22.7 billion
Medicaid                                    259.2 billion
Non-Medicaid health                24.6 billion
Recreation and culture                0.5 billion
Education                                     63.5 billion
Income security                        497.8 billion

Take a good look, people. If reason prevails, what you’re getting now from Uncle Sam is about as good as it’s going to get. If reason does not prevail (we’re talking about Congress, after all), the ultimate reckoning will be all the worse.

Maintaining our Business As Usual policies amounts to willful negligence and governmental malpractice.

One Response to Don’t Look to Uncle Sam for Help

  1. The irony is that we do have a model for limiting spending expenditures.

    It’s called Social Security and it works like this:

    1: it is not funded from General Revenues but instead from a dedicated tax

    2. the revenues for that tax are earmarked for one purpose and nothing else

    3. by law, you cannot pay out more benefits than the tax brings in – in revenue.

    now we got some anti-govt boo birds who say that the trust fund that was built up by FICA funds was “raided” and spent – which is true.

    and if you don’t want govt to pay a just debt, just renege on it (and see what happens to treasury notes).

    but let’s say you actually do that – then what?

    the law says you cut benefits.

    now the same boo-birds will say that they do not believe that govt won’t make up the cuts.

    Perhaps but that would then be a legitimate subject of debate and it would not happen without both Houses of Congress and the POTUS agreeing.

    Contrast that to the things that Jim mentions like pensions and health care which have no such restrictions on spending.

    I’d say if the rest of govt spending were set up like Social Security is we’d not have automatic “creep” but rather each expansion would require an explicit vote to do – and I’d bet that such votes would often not approve.

    For that reason, I like dedicated taxes – specifically earmarked to specific spending – and nothing else.

    So take the meals tax in Henrico and tie it directly to one earmarked purpose and then require that that purpose only be allowed to spend what the tax brings in and nothing more.

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