Take heed Governor Ralph Northam! Take heed Virginia House and Senate budget negotiators!
One in five tax dollars collected by state and local governments across the United States go to Medicaid and public-employee health and retirement costs. Of the $136 billion growth in inflation-adjusted taxes collected by state and local governments between 2008 and 2016, two-thirds went to funding Medicaid and pensions, according to the Wall Street Journal:
The picture will get worse as Medicaid expenditures metastasize and pension backlogs build. Medicaid’s annual cost, which was $595 billion in 2017, will exceed $1 trillion in 2026. States pay about 38% of that tab, although the percentage varies from state to state. A relatively affluent state, Virginia pays a higher percentage than average.
As Medicaid and pensions crowd out other spending, states have cut back on higher education, infrastructure, and aid to localities. Across the country, state cuts in support for higher education have prompted public colleges and universities to jack up tuition and fees, thus transferring costs to students and their families.
“The more we stare at the data, the more we realize all roads lead back to Medicaid and pensions,” says Dan White, a director at Moody’s Analytics, of the top three credit rating agencies.
Many localities are just one recession away from bankruptcy. The finances of Illinois, Connecticut, and New Jersey are in particularly perilous condition. Connecticut’s state capital, Hartford, narrowly averted bankruptcy last year. These high-tax states are caught between a rock and a hard place. Increasing state income taxes raises only a fraction of the anticipated revenue because they encourage wealthy taxpayers to leave for lower-tax climes.
States and localities shouldn’t expect much of a bail-out from Uncle Sam. As a different Wall Street Journal article today notes, interest payments on the national debt are doing to the federal government what Medicaid and pensions are doing to state governments.
To be sure, the U.S. federal government enjoys an unparalleled capability to borrow more money. And borrow it will. Interest payments swallowed 8% of federal revenue last year, the highest share of any AAA-rated country. Moody’s thinks that figure will triple to 21.4% by 2027.
“As interest is rising, that crowds out other spending,” says William Foster, a Moody’s analyst.
Many observers point to Japan as a nation with a national debt burden per capita twice that of the U.S. as a reason to be sanguine about the national debt. Japan may have lost its AAA rating, but it still has no problem borrowing. That analysis overlooks something that Japan has that the U.S. does not — a high personal savings rate. The U.S. personal savings rate was 2.4% in 2017. The savings rate in Japan fluctuates wildly from month to month but averaged out to 18% last year. In December, Japan’s personal savings hit the insane rate of 50%. Accordingly, as a percentage of tax revenue, Japan’s interest payments were only 5.3% — lower than the U.S. rate of 8.3%. Also, thanks to massive domestic savings, Japan does not rely upon fickle foreign creditors like the U.S. does.
Regardless, Republicans have pushed through a tax cut that, despite punching up the economic growth rate, will reduce revenues. Meanwhile, Republicans and Democrats have joined to enact a budget that boosts both defense spending (a Republican priority) and non-defense spending (a Democratic priority), while refusing to touch entitlements.
“We’re in a full-blown era of free-lunch economics where no one says no to anyone anymore,” Maya MacGuineas, president of the Committee a Responsible Federal Budget, told the Journal.
Virginia’s economic and tax revenues seem manageable for the next year or two, but budgets can unravel with horrifying speed. Very few foresaw the 2008 recession, much less its severity. Very few will see the next recession. Even fewer will be prepared. Will Virginia?