Resetting State Government Spending

A voice of sanity—apparently rare—among even the “conservative” governors in the country, Indiana Gov. Mitch Daniels makes a lot of sense:

State government finances are a wreck. The drop in tax receipts is the worst in a half century. Fewer than 10 states ended the last fiscal year with significant reserves, and three-fourths have deficits exceeding 10% of their budgets. Only an emergency infusion of printed federal funny money is keeping most state boats afloat right now.

Most governors I've talked to are so busy bailing that they haven't checked the long-range forecast. What the radar tells me is that we ain't seen nothin' yet. What we are being hit by isn't a tropical storm that will come and go, with sunshine soon to follow. It's much more likely that we're facing a near permanent reduction in state tax revenues that will require us to reduce the size and scope of our state governments. And the time to prepare for this new reality is already at hand.

The coming state government reset will be particularly wrenching after the happy binge that preceded this recession. During the last decade, states increased their spending by an average of 6% per year, gusting to 8% during 2007-08. Much of the government institutions built up in those years will now have to be dismantled.

For now, my state's situation is far better than most, but it won't stay that way if we fail to act in Indiana. At present, we are meeting our obligations, without raising taxes, and still have over $1 billion in reserve. But the dominant reality is that even assuming the official revenue projections are accurate (and they have been consistently too rosy for the past two years), the state of Indiana will have fewer dollars to work with in 2011 than it did in 2007. Most other states face similar or worse prospects.

And, unlike the aftermath of past recessions, odds are that revenues will take a long time to catch back up to their previous trend lines—if they ever do. Tax payments have fallen so far that it would require a rousing economic rally to restore them. This at a time when the Obama administration's policies on taxes, spending and more seem designed to produce the opposite result. From 1930 to 2008, our national average annual real GDP growth rate was 3.49%. After crunching the numbers, my team has estimated that it would take GDP growth of at least twice the historical average to return state tax revenues to their previous long-term trend line by 2012.

Read the rest here.

LLE

Comments

[Brutus]

Wow, a little sanity can be seen through the fog.

Initially, three things come to mind.

First, how great if all of the states would do this and hopefully put an end to the incredibly horrid tradition of ordering their legions to cite, ticket, and generally plunder their states' citizens to make up for lost revenue.

Second, if the states all do the same, they would immediately free up a great number of people into the economy which would, at first, lead to some discomfort but would ultimately result in a more robust economy as people went back to work in the private sector.

Lastly, this could only work if the federal government does the same and stops leaning on its printing press. With a reduction of services at the state level, I can't imagine that the central politicians would resist picking up the slack. They would jump on the opportunity to debilitate the states even further while spending money to buy even more votes.