BUDGETS FOR STATE AND LOCAL GOVERNMENTS ARE DECIMATED
by David Schleicher
SLATIST/Jurisprudence
April 30, 2020
As President Donald Trump has deferred to governors on major aspects of the coronavirus response in recent weeks, a new theme has emerged among commentators that we are entering a new era of federalism. Some have described it as an “Articles of Confederation” moment, where the national government recedes and state governments assert their authority. Earlier this month, the New York Times heralded “The Return of the Governor.”
Rather than making governors ascendant in the long run, however, the COVID-19 crisis is likely to make state governments trim the sails of their policy agendas for years. And it is likely to make states evermore dependent on the federal government. The COVID-19-triggered economic crisis is such that, absent aid from the federal government, states will suffer. But even if the federal government provides substantial amounts of aid to states and cities, there is a good chance it will come with conditions that will substantially undermine state independence.
Trump, for his part, indicated on Twitter on Monday that he does not intend to provide the states the funding they desperately need without some kind of fight. “Why should the people and taxpayers of America be bailing out poorly run states,” he wrote. After this crisis is over, it’s likely federalism won’t look the same.
The COVID-19 crisis has been particularly painful for state budgets, which, give or take, need to be balanced, unlike the federal budget. (States have some tools for avoiding constitutional balanced budget requirements and debt limits, from underfunding their pensions to trickier forms of debt management, but they still face substantial limits on running deficits.) The pandemic has particularly decimated sales tax revenue, one of the steadiest forms of state revenue. The numbers are gruesome. Gov. Andrew Cuomo estimated that New York would need to cut education and other areas by as much as 20 percent. Michigan is expected to lose between $1 billion and $3 billion by this June, and then between another $1 billion and $4 billion next fiscal year. And this doesn’t count the budget carnage and already mounting layoffs we see at the municipal, county, school district, and public authority level. Illinois’ state Senate leader earlier this month asked Congress for a $41 billion bailout.
What does this mean? States will have to raise taxes and cut spending drastically to make ends meet. This will worsen the recession—states and cities will have to lay off lots of workers when unemployment is at its worst. And it will mean that all aspects of state spending that are not about COVID-19 will face steep cuts. Transportation and other infrastructure spending, higher education, K–12 reform, affordable housing, and many other state initiatives will all be set back substantially.
To the extent that they borrow to get out of the hole, state debt burdens will get bigger and their capacity to do big things going forward will be further reduced. On top of this, local newspapers, declining before the crisis, have been hit hard, and access to the local press is an important means for governors to communicate what is going on in their states. The governors now dominating the airwaves with their popular coronavirus press briefings will likely soon be reduced to the role of grim accountants.
What’s been done by the federal government so far is not nearly enough to make up the COVID-19 shutdown budget shortfalls. Congress authorized $150 billion in aid to states and cities in the CARES Act and provided money to transit agencies and hospitals and for education. The Federal Reserve announced a massive program to provide short-term financing to states and cities. But state aid was left out of the most recent “Phase IV” congressional legislation, and key Republican leaders are already balking on future money. In addition to Trump’s suggestion that he would not “bail out” states, Republican Senate Majority Leader Mitch McConnell has brought up the idea of letting states file for bankruptcy, rather than giving aid. Former South Carolina governor and U.N. Ambassador Nikki Haley also came out against any further state aid.
Trump, McConnell, and Haley are drawing on a deep history. For almost two centuries, the federal government maintained a “no bailouts” policy with respect to state governments. After eight states and a territory defaulted on debt in the early 1840s, Congress rejected a bill to assume state debts, as it had done several times prior to that. The federal government’s “no bailouts” rule largely has been honored, through defaults in the 1870s and in 1933, although somewhat less strictly than many think. (For instance, despite the famous Ford to City: Drop Dead headline, the federal government did provide loans to New York City as part of the response to its financial crisis in the 1970s.)
Scholars like Jonathan Rodden and Robert Inman argue that a bailout regime is inconsistent with state independence. The reason is that getting bailouts creates a “soft budget constraint,” making states less willing to make difficult fiscal choices because they think the feds will come to the rescue. These scholars argue that states that need less aid will resent the bailouts. As a result, these states and then the federal government will demand conditions on aid to needy states when push comes to shove. When national governments provide aid but do not demand conditions, you see debt crises, like those that hit Argentina and Brazil in the 1980s and ’90s. In countries where the national government comes to the aid of states, the national government usually plays a much more active role in monitoring state budgets and in taxing and then transferring it to states.
In contrast, in the U.S., the federal government has traditionally not overseen state budgeting. States are not even required to disclose information about their fiscal situation to sell bonds, as they are exempt from the 1934 Securities Exchange Act.
But the next round of aid, if it is forthcoming, is likely to contain conditions. You can see the writing on the wall. Leading serious conservative thinkers like Andrew Biggs and E.J. McMahon have argued that any aid to Illinois or New York should come with substantial conditions, from changed accounting rules to requirements that defined benefit pensions be moved to 401(k)-style defined contribution plans. The only thing that may save states from substantial conditionality is divided power in Congress and an inability of Democrats and Republicans to agree on the terms of conditions. But that same dynamic can hold up aid entirely, leaving states to cut more dramatically or face financial ruin.
If Congress proposes aid with conditions, states will likely be in no position to turn them down. The Federal Reserve’s aid is less likely to come with its own strings, except for one major one—the money will have to be paid back down the line, as it is providing loans, not grants.
Over the next year, states will be dealing with a continuing public health emergency, huge new demands on public services, radically reduced revenues, insufficient federal aid, increasing debt loads, and potentially new conditions imposed by the federal government, if they even get lifesaving infusions of cash to begin with.
Federalism is changing, but not in the direction of more state power.
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It’s an interesting double edged sword. Red states balance budgets at the expense of their people, year in and year out. The red states are poorer and have shorter lifespans in return for their lower taxes. Michigan has acted more and more like a red state in the last 20 years, and the results…we are in the bottom third of income. Is that the outcome we want? Blue states spend more, but get better outcomes for their people (blue states also have more millionaires per 100000 residents than red.) and donate far note to the federal coffers than they take.
Meanwhile, the reddest states get every year a lot more money from the feds (they are taker states) because they refuse to spend their tax dollars on low income citizens. In effect we are bailing out their lower income citizens while letting their upper class citizens avoid state taxes.
This is the most idiotic comment I have seen to date on this topic: “the red states have shorter lifespans in return for their lower taxes..” Really? Your observation is devoid of any rational analysis. Some of the most prosperous states are the state with NO income tax, such as Washington, Texas and Florida. Lifespan is much more dependent on behavior. Why are the high-tax blue states the states with the most population outflow? The highest budget deficits? The highest unfunded pension liabilities? Those most anti-federalist in terms of supporting federal law enforcement? Love to hear your “analysis”, David…
I agree wholeheartedly with your comments! Thanks!
As Usual a tunnel vision review of
This short term revenue problem for
The states .GOOas usual ,
Supporting the Military industrial Power
Mongers .Not a word spoken about
Reducing our military budget to help
The States with no interest loans .
States could double sales tax rates for
6 months to repay . Spartans will!
Interesting article, with a nice history and civics lessons thrown it. Should be a homeschooling assignment.
There will be significant consequences regardless of what Washington does, or does not do.
The article states:
“Leading serious conservative thinkers like Andrew Biggs and E.J. McMahon have argued that any aid to Illinois or New York should come with substantial conditions, from changed accounting rules to requirements that defined benefit pensions be moved to 401(k)-style defined contribution plans.” Pensions and other post employment benefits (PEBs) are a reason workers put up with the crap the State employers dish out. When other states do what Michigan has done (new state employees have not had a pension since March 31, 1997 and retiree health care ended January 1, 2012, both replaced with 401ks), they will get what we have, a view that working for the state is only a temporary waystation and not a career. As a retired state of Michigan employee, this leads to a much more transient workforce. And tax and spending policies that Mr. Waymire believes (often correctly I believe) that are bad in the long term will become the norm.
Here, Michigan will have to raise taxes, unless the GOP wants to effectively dissolve state government. The GOP has been in the thrall of a cult, the Cult of the Divine Market and Divine Tax Cut. This may be their “come to Jesus” moment, if they can reject the unholy trinity of Adam Smith, Milton Friedman and F A Hayek (not holding my breath). This pandemic coupled with the 6th CCA decision on “the right to read” decision, means they need more money, lots of it – though I can see Shirkey and Chatfield moving money from wealthier districts that generally vote now for Democrats – to Detroit to fund the Court’s decision.
Now some states are in better shape than others, for a variety of reasons. On April 26th, Kevin Williamson wrote in National Review the following:
“Contra Mitch McConnell, the Senate majority leader, this is not exclusively a “blue state” problem.
State and local governments are facing short-term financial problems that are tied to the epidemic and the imposition of social distancing, lost tax revenue prominent among them. With businesses forcibly closed and unemployment soaring, there is less money coming into state, county, and city tax coffers. Some states are better prepared for this than others: Wyoming maintains a “rainy-day” fund that has socked away in it funds equal to 109% of the state’s annual government expenditures. Alaska has more than half a year’s expenditures tucked away, North Dakota 30%, New Mexico 27%. Most states have a good deal less, and some have very little: New York has only 3%, Pennsylvania 1%, and Senator McConnell’s home state of Kentucky less than 3%. Illinois, to nobody’s great surprise, comes in at 0.0%, no doubt from spending all its money on Chicago-style avocado toast.
Conservatives often have been critical of these funds, characterizing the reserves as excessive and arguing that the funds should be drawn down to finance tax cuts. In uncertain times, Wyoming’s big fat fund looks pretty smart.”
Wonder if the GOP wished they hadn’t spent earlier monies on tax cuts? Ah, the price of heresy.
The real pity is the rabid cost-cutting going on in the media. Newspapers, too many of which are in the hands of vulture capitalists, are purging staff. Detroit TV does not really cover Lansing, except as a traffic accident, only there when disaster strikes. God how we could use Tom Greene again. Or have a new generation of Dave Waymires, Peter Lukes and others covering state government again.
One thing, government will again be interesting to watch. The only question is whether TV, radio and print media will spend the resources to educate the people as not enough people watch “Off the Record” or read Gongwer, MIRS or the Ballenger Report.
Sorry for the length of the response, but every now and again when things are not going well, the urge to slaughter electrons in emails becomes overwhelming. Thank you for reading my rant/response.
Great observations, Tim!
Thank you!
Great comments!
Note: 2nd Attempt to post. Is Mr. Ballenger up to some mischief?
Regardless of a man-made financial crisis such was the case in 2008 with the “subprime mortgage crisis,” and the negative financial ripple effect that it created or today’s pandemic crisis, we experience, the same cliches are offered of how did state government ever get into this mess in the first place? Much of our Michigan problem lies with the state-wide elected leaders, mainly republicans, but some democrats too, who have masqueraded as financial experts. Voters too, are to blame, since they’re the ones who put them into office.
There are at least three major problems built into Michigan’s tax revenue structure, which have contributed mightily to Michigan’s funding crisis that have to be fixed. Even in so-called good times, we can see first-hand what revenue shortfalls have done as to why roads don’t get fixed, pollution doesn’t get cleaned up, and school funding lags to the detriment of school children, just to name a few major issues Michigan faces.
1. Since Michigan passed the Headlee Amendment in 1978, untold billions in tax revenue have been lost. Although research on the overall effect of Headless is hard to find, at https://www.bridgemi.com/truth-squad-companion/michigan-tax-facts-part-8-what-would-richard-headlee-think-today, shows that “in fiscal year 2013, state revenue stood $6.5 billion below that limit. The year before, it was $5.2 billion below. Altogether, state revenues are more than $90 billion dollars below that limit since 1979.” Even though this article was written six years ago in 2014, it states, “K-12 student performance in Michigan now lags behind most other states. College students are on the hook for a much higher proportion of their college costs than in the past generation. Michigan suffers from eroding roads, sewer and water system infrastructures. Many local governments have cut services ranging from parks upkeep to police and fire staffing.” And because of this financial crisis created by the pandemic, that Michigan was not prepared for, it appears the same local governments, schools, colleges and Michigan’s infrastructure will again suffer greatly. I’m sure once cuts are again made, there will be many more casualties to come that will be added to this list.
2. Since 2011, corporations have received a yearly $2 billion dollar tax cut, into perpetuity, as a result of former Gov. Snyder’s and the republican legislature cutting taxes for corporations. According to a Bridge Magazine article in 2018, it says, “Business taxes, meanwhile, are an estimated 1.9 percent of the state revenue pot.” It’s immoral to think that Michigan corporations contribute less than 2% in business taxes to Michigan’s overall revenue structure.
3. Michigan gives out a ton of additional business tax breaks (corporate welfare) on the belief that these tax breaks create jobs. At https://www.bridgemi.com/special-report/michigan-doles-out-more-tax-breaks-it-spends-schools, shows that in 2017, the state doled out $27.5 billion dollars’ worth of business tax breaks, more than it collected for schools and general government revenue; $7 billion more in 2017 than they were in 2000. Michigan elected leaders have invested so much money in corporate welfare that we haven’t been able to invest in public infrastructure, such as schools, roads and cleaning up the environment. And it appears as though there is no data in Michigan to even know if these tax breaks even work at job creation, although I did read where finally in 2018, Michigan passed a law for regular evaluation of tax incentives. My goodness, what took so long. To it’s detriment, Michigan’s use of economic development never includes investing in it’s citizens.
Based on at least these three above revenue defects, anyone who says Michigan citizens and corporations are overtaxed, don’t have much financial sense or know a lot about how a state can and should invest in itself. One thing definitely for sure has been proven completely, over these past 30 years or so, Michigan couldn’t and didn’t tax cut their way to prosperity.