High-spending states feel budget crunch: While regulations said to be draining taxpayers

With three-fourths of state governments singing the budget blues this year, a range of fiscal experts has diagnosed the problem: over-regulation and unfunded mandates by federal and state lawmakers and bureaucrats.

Experts also claim that states are no longer the independent entities envisioned by the Founding Fathers – separate governments free to manage themselves autonomously in a loose confederation with Washington, D.C., counteracting what was originally envisioned as a weak central government role with few defined national functions.

Also, experts who spoke at length with WorldNetDaily said that representatives from both major political parties – Democrats and Republicans – are behaving virtually the same when it comes to managing state resources.

And in their analysis of current state budgetary woes, they said that while many legislatures were able to bank surpluses in the 1990s, emulation of Washingtonian over-regulation, coupled with a rise of the welfare-state mentality, has drained those resources, leading state officials down the same path of fiscal mismanagement and budgetary shortfalls as their brethren in the nation's capital.

In the end, say analysts and experts, it all means that the nation's taxpayers will have to bear the brunt of the mismanagement and over-regulation again.

"Federal regulations alone impose a massive burden on state localities," said Angela Logomasini, director of risk and environmental policy at the Competitive Enterprise Institute.

Chris Edwards, who heads up fiscal policy at the CATO Institute, added: "If you look at total state and local spending as a percent of the [Gross Domestic Product], it's risen from 10.6 percent in 1985 to 12.5 percent in 2001. That may not sound big, but the nation's GDP is $10 trillion, so 2 percent of that is about $200 billion in extra taxes folks pay to state and local governments."

Then there is federal spending. Nationally, the figures are sobering if not disturbing: The Bush administration's budget next year is more than $2 trillion, or about one-fifth of the country's gross domestic product.

"Our founders went to war with Britain over taxes of around 10 percent," one analyst said.

"No question – the federal government is driving a lot of the regulatory increases that have taken place at the state level," proffered Lew Rockwell Jr., an economist and president of the Ludwig von Mises Institute in Auburn, Ala.

"Whether you're looking at labor law or environmental law or a million-and-one other things the federal government does, it makes it more expensive for taxpayers and state governments," he said.

"They're glad to tax and spend," said Rockwell. "But they don't have any independent authority anymore since they're pretty much 'departments' of the federal government."

"Taxes and regulations are already overwhelming some localities," Logomasini said. "And there are more coming that are going to be more expensive. The burden is really hitting rural America. It's getting to the point that you can't live in rural America."

Experts say part of the problem is that so many leaders on the state level are becoming far too ready, willing and able to be shills for Washington rather than act as local representatives of the people who elect them. In the process, many state leaders are becoming as unaccountable and aloof as their federal counterparts. Recent reports analyzing state spending trends prove that such observations are on the mark; in terms of income and spending, state governments have unquestionably learned to live large over the past decade.

A 1999 study by CATO, for example, found that between 1992 and 1998 "state revenues grew at almost twice the rate of inflation plus population growth."

"If states had restricted increases in spending and tax collection to the rate of inflation and population growth over the period 1992–98, the state tax burden would be $75.2 billion lower today, or $278 less per person," the study said.

"Between 1988 and 1997 … state governments' real per capita spending increased by almost 30 percent, with an almost equal increase in revenues," writes David Merriman, in an analysis for the Urban Institute, a nonprofit, nonpartisan policy research and educational organization that examines social, economic and governance problems.

"While it is not surprising that state budgets increase during good economic times, state spending during this period increased faster than both personal income and economic output did," said Merriman.

In an era of almost no inflation, state spending grew by 4.5 percent in 1996, 5 percent in 1997, and nearly 6 percent in 1998, CATO analysts said. Four states – Vermont, Florida, Nevada and South Dakota – raised their spending by more than 10 percent; budgets in seven other states – Mississippi, Oregon, Arkansas, West Virginia, Texas, Missouri and New Hampshire – ballooned 30 percent after adjusting for population growth and inflation since the early 1990s. In the four years prior to 1999, "only about one of every three dollars of the unexpected revenue surpluses has been returned to taxpayers," said the CATO study.

Returning to fiscal responsibility may be politically difficult, Rockwell says. State leaders who "stand up" to Washington's politicians "are smeared, branded a Neanderthal and marginalized" by the "government-media combine."

"They talk about separation of church and state, but as Mary Rothberg used to talk about, what we really should be concerned about is 'the separation of intellectuals and state,'" said Rockwell.

Others believe there may be a sort of devolution of "historically federal responsibilities" for many programs from Washington to states. Even if true, critics argue, mandates continue to flow from Washington's plethora of bureaucracies, but the money to pay for them doesn't.

In terms of real solutions, state governments aren't optimistic – at least not in the foreseeable future.

CATO's analysts concluded in 1999 that "unless states begin to cap expenditure growth and cut taxes to reduce the revenue intake of state governments, they may be faced at the end of this expansion with the same massive deficits that created tidal waves of red ink when the 1980s boom ended."

"Recent economic data suggest the economy is recovering, but states still are experiencing dismal budget situations," says a May 2002 fiscal analysis by the National Association of State Budget Officers. "Revenue growth is anemic, spending pressures continue to rise, and states are facing massive budget shortfalls."

NASBO says states are facing budget shortfalls totaling $40 billion this year. [Editor's note: NASBO has examined each state's budgetary requirements for the coming fiscal year and broken them down in a report posted here The report is posted in a .pdf file, and you must have Adobe Acrobat to view it.]

Frank Shafroth, a spokesman for the National Governors' Association, told WorldNetDaily that "easily" more than three-fourths of state governments are having budget problems.

"I'd say maybe 41, 42 of them," Shafroth said. "There are two major problems. On one side, states are coming up short on revenues. On the other side, the cost of providing Medicaid is increasing as much as 14 percent."

The shared federal-state program, he said, is increasing in cost because of "skyrocketing" medication costs, as well as an increase in the number of people over 65.

"For the first time ever, Medicaid has become a bigger program than Medicare" in every state, he said, noting that Washington has not boosted its share of funding to offset those increases.

"There is this horrible long-running overhang of Social Security and Medicare costs that have been completely ignored on the federal scene," Edwards agreed. "That's going to be the thing that really wallops taxpayers 10 to 15 years down the road."

In one bit of good news, the Rockefeller Institute said that while "state revenue … slowed dramatically in 2001," tax increases were rare. Instead, many states drew on their fiscal reserves to make up shortfalls, said the report.

However, those reserves are now dwindling, and with slowed economic activity coupled with increasing revenue drains, that spells bad news for future budgets.

Is it possible to scale back agencies or eliminate them altogether? Many fiscal conservatives like to think so, but experts say decades of regulatory control from Washington have left states too intertwined with the federal government to drop many programs altogether.

"Where there are duplicates [agencies on the federal level], it often means there are no federal people to enforce the law or implement it at the state level," he said. Consequently, there has to be a state equivalent of most federal agencies to ensure the edicts are carried out.

"There are a lot of federal laws that rely on states to do the actual implementation," he said.

A good example, Shafroth said, "is the education bill that [President Bush] just signed. Guess who gets to pay most of the cost of that bill and is responsible for carrying it out? States."

"The problem," Edwards explained, "is state governments sort of get lured into having their traditional responsibility federalized because the federal government promises them money."

When the money runs out, however, states are still left with the programs and the responsibility for funding them.

To combat the funding addiction, "you'd need sort of a united front of governors to tell the federal government, 'Get out of education,' for example, 'because we don't want your money.'"

But it would take time – years, even – for state leaders to develop funding alternatives to federal money.

Experts agreed, noting that the addiction to federal money took time – about 40 years, by some estimates. Edwards said it began when Congress and subsequent administrations attempted to "equalize" the per capita income between states in an engineered effort to end the disparity between rich and poor local governments.

In recent years, however, the poorer states – many of them in the South – were beneficiaries of huge population shifts, said Edwards. And with more people came more opportunities and, ultimately, more income.

"Now those states are pretty much like all the others," in terms of per capita incomes, Edwards said.

There are other impediments for states attempting to break free from Washington's all-encompassing control.

"There's no limit on what Washington can do because it has its own central bank," said von Mises' Rockwell. "But there's a limit on what states can do – they don't have their own central banks. They can't print up money and make fiscal policy" on a whim.

Edwards said the irony is that federal tax money "comes ultimately from citizens who live in states anyway."

"What's the point of sending money from Indiana to Washington, then sending it back to Indiana?" he said.

The problem with overreaching federal regulations, analysts say, is that they hit all states.

It's impossible, for instance, to get away from the burden of the U.S. tax code, because they apply to residents of every state. The burden of the federal government is compounded by state and local governments, which also tend to over-regulate.

"A lot of people tend to focus [only] on federal regulations," Logomasini said, "but it stands to reason that people [in heavily regulated states] are paying high premiums for all those regulations."

She mentioned California and New York as just two examples of regulatory "havens."

"I think it's really bad for democracy that we have, more and more now, the federal government encroaching on state territory," Edwards said. "Obviously, the growth didn't start under Bush, but there are all kinds of other encroachments going on."

"We are concerned that the trend during the past several years of prosperity for states has been to ratchet up state budgets instead of returning revenue surpluses to taxpayers," said a separate CATO report, published in 2000, entitled, "Fiscal Policy Report Card on America's Governors: 2000."

"Roughly two of every three surplus dollars in the state coffers since 1996 have gone to new spending, not to tax reduction," the report said "Ironically, Republican governors were more aggressive in cutting taxes in the early 1990s, when the states were in fiscal shortfall, than they are today with the largest budget reserves in nearly two decades."

In terms of over-regulation by state and federal government, Edwards said it has gotten so bad that accountability has been lost – even on the local level.

"Voters really don't know who to hold responsible for, say, their local failing school or worsening crime," he said. "People should be able to point a finger at the appropriate level of government. But if the schools are lousy or crime is out of control, do you point the finger at local officials or Washington?"

And the prediction is, almost universally, for worsening conditions, in terms of economic and regulatory burdens.

"In my view, we've got far more serious trouble ahead," Rockwell said, noting the recent volatility on Wall Street caused by, he said, the "excesses of the 1990s."

"What's the worst thing any government can do in a time of economic downturn? Increase taxes" and regulations, he said.

"Always remember that taxes is shorthand for 'wealth destruction,'" said Rockwell. "But governments also destroy wealth with spending and regulations."

No question – the federal government is driving a lot of the regulatory increases that have taken place at the state level,"

And the state legislators refuse to say "No" to this usurping of power.

Another hard-hitting, thought provoking article from WND.

When the money runs out, however, states are still left with the programs and the responsibility for funding them...

and..."Roughly two of every three surplus dollars in the state coffers since 1996 have gone to new spending, not to tax reduction," the report said..."

I don't quite know who's responsible for what here, as the article says, but folks in Ohio will recognize the name "Judge Linton Lewis"...his rulings on public education are helping to "bank-rupt" our State Treasury...

Having said that, I guess we know what many of the problems are...I wish someone would start offering some practical solutions!!

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.