State spending

Posted: Jun 24, 2003 12:00 AM

Any college kid with too much credit-card debt might look longingly at state governments these days and wonder: How can I do that? The states are having a fiscal crisis without reducing spending.

If the states face the worst fiscal emergency since World War II, as governors are wont to complain, they aren't acting like it.

According to USA Today, state spending increased 6.3 percent in the fiscal year ending June 30, 2002. It increased another 5 percent in the fiscal year ending this month. During the past two years, states have added workers, hiring another 74,000 people at a time when the private sector is shedding jobs.

It is imprecise to say that the states are suffering from fiscal crises. They are really suffering from overspending crises, fueled during the boom when it seemed the good times would never end and continuing through today.

State spending increased 38 percent from 1997 to 2002, an increase on average of more than $1,000 per person. Most states have doubled their budgets since 1990, and through the 1990s, state spending grew at two times the rate of federal spending.

A USA Today report says that state and local spending soaked up 15.2 percent of U.S. personal income in 2002 -- the highest rate on record, and up from 13.3 percent in 1980.

Yes, states generally cut taxes in the late 1990s, but this doesn't account for their fiscal troubles now. As a report from the libertarian Cato Institute notes: "During the 1990s, large tax revenue increases occurred despite substantial state tax cuts. Indeed, total state tax revenues grew $186 billion between 1994 and 2001 ($374 billion to $560 billion), even though states enacted net tax cuts of $33 billion."

The level of taxation doesn't determine the fiscal health of states. Low-tax Colorado, for instance, has been spared the tide of red ink overtaking other states.

Colorado voters enacted an initiative in the early 1990s capping state spending growth at the inflation rate plus population growth. Almost every politician in the state opposed the initiative, but it served to impose by law a fiscal responsibility that lawmakers probably wouldn't have been capable of on their own.

Likewise, Georgia, Utah and Delaware didn't go on a spending spree during the boom and quickly trimmed their finances when the bust came. They aren't feeling the dire effects of the overspending crisis.

California, on the other hand, is -- with a vengeance. It spent like a recently minted Internet millionaire during the boom and kept right on going into the bust, hoping that accounting gimmicks would hold it over. It faces a budget shortfall of nearly $40 billion.

States, almost all of which have laws demanding balanced budgets, are doing everything they can to avoid facing their situations frankly. They have borrowed funds roughly equal to 10 percent of their revenue. California, Colorado, Kentucky, Tennessee, New Jersey and Wisconsin have all seen their credit ratings downgraded during the past two years.

The National Governors Association essentially exists to make excuses for state fiscal incontinence, since governors are responsible for so much of it. It recently demanded that Congress "provide substantial funds to every state territory," since "the governors believe the most powerful immediate economic stimulus for the nation's failing economy is to provide fiscal assistance to the states."

If state spending were the key to economic growth, the economy never would have experienced a recession in the first place. The recently passed Bush tax cut nonetheless included $10 billion in aid to states this year and another $10 billion next year.

This federal bailout just takes money from taxpayers in frugal states to subsidize taxpayers in spendthrift states. There is likely only to be more such demands from governors as they try to avoid the most basic act of governance: living within their means.

Governors see the "crisis" as having to trim the state budget. This is what they don't get: That's the solution.