Overspending, Heavy Debt Are Causing States’ Budget Shortfalls

Published March 1, 2009

Thirty states are facing budget shortfalls of approximately $30 billion in total in fiscal 2009, and 25 are in line for shortfalls totaling about $60 billion in 2010, according to information collected by the National Governors Association, National Association of State Budget Officers, and National Conference of State Legislatures.

Analysts say the deficits are due to runaway spending, not an inability to raise enough tax money.

“Overspending is the source of current budget woes,” explained Chris Edwards, director of tax policy studies at the Cato Institute. “According to the Bureau of Economic Analysis data, total state and local government spending was up 7 percent in the first three quarters of 2008 over 2007.”

‘Unsustainable Spending’

Jonathan P. Williams, director of the American Legislative Exchange Council’s Tax and Fiscal Policy Task Force, agrees.

“States are not facing budget deficits because they don’t tax enough,” said Williams. “The fundamental problem is overspending taxpayer dollars. State spending has grown at an unsustainable rate over the past decade; up 124 percent over where it was just 10 years ago. State debt increased 95 percent during that same period.”

‘Sorely Mistaken’

A Business Week report indicated some states experiencing shortfalls are planning “cuts” in Medicaid, welfare, state universities, infrastructure projects, and hiring, but in many cases these cuts are merely reductions in the rate of growth.

NGA reports while fiscal 2008 state general fund spending growth of 5.3 percent was lower than the 31-year average annual increase in state spending of 6.3 percent, it was nonetheless significant growth.

States are proposing all manner of tax and fee increases on a wide variety of goods, services, and conditions, such as vehicle and professional licenses, oil production, alcohol, cigarettes, hospitals, obesity, satellite television, and high incomes.

“States that believe they can solve their budget shortfalls by increasing taxes on the rich are sorely mistaken,” warned Williams. “States that keep spending and taxes low exhibit the best economic results, while states that follow the tax-and-spend path lag far behind.

“Specifically,” Williams noted, “high marginal tax rates on income lead to disastrous economic consequences. Some states may well choose to adopt a so-called millionaire’s tax, but they do so at their own peril.”

‘Freeze Pay’

Analysts have several suggestions for real budget cuts.

“Freeze pay for workers,” said Edwards. “Worker compensation is about half of total state and local government expense. Cut school budgets by increasing class sizes and reducing administrative personnel. And delay new capital infrastructure projects but move aggressively toward privatizing infrastructure spending so that the private sector can get the economy moving.”

Williams added, “The key to solving budget problems is having the ability to say ‘no’ to reckless spending. If families and businesses are required to live within their means, state governments should have to as well.”

Brien Farley ([email protected]) writes from Genesee, Wisconsin.