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The Republican War on the States

December 8, 2010

For years, American federalism has been characterized by "red state socialism," the one way flow of federal dollars from blue state taxpayers to red state recipients. For example, Sarah Palin's home state of Alaska ranked third in federal tax dollars received per dollar of taxes paid by state residents. But now that recession-ravaged states like California, New York and Illinois are on the financial brink, Republicans leaders like Palin want to push them over the edge.
In just the last few days, the Washington Post, the New York Times, Reuters, Bloomberg, the Wall Street Journal described the fiscal triple-whammy facing the states. Even with spending now well below 2008 levels, the downturn-induced drop in revenues and increased demand for social services coupled with the looming end of the American Recovery and Reinvestment Act (ARRA) is producing yawning gaps in state budgets. And the states, all but one of which must balance budget each year, are responding with draconian spending cuts and deferred payments to state employee pension funds.
This week, both the National Conference of State Legislatures and the National Governors Association sounded the alarm. In its report, the NGA described a $65 billion "cliff" facing the states despite further cuts already made this year:

One of the clearest signs of state fiscal stress are mid-year budget cuts as they highlight the difference between budgeted levels of spending and forecasted revenue collections. For fiscal 2010, thirty-nine states made $18.3 billion in mid-year budget cuts. Thus far for fiscal 2011, 14 states have made $4 billion in cuts. In 2009, 43 states cut $31.3 billion and in 2008, 13 states made $3.6 billion in mid-year cuts.

The scope of the disaster - and the threat to the American recovery - has been evident for months. Economist Stephen Gordon warned that "that total government spending has been a drag on growth over the past two quarters" because "the increases at the federal level have not been enough to compensate for the spending cuts at the local and state levels." This summer, the Center on Budget and Policy Priorities forecast that the states' combined $89 billion budget hole put 900,000 jobs at risk. By October, as David Leonhardt summed it up in the New York Times:

Local governments are cutting jobs at the fastest rate in almost 30 years.
They cut 76,000 jobs last month and over the last three months have cut 143,000 jobs, many in education, according to today's jobs report. That's 1 percent of total local-government employment across the country. Since the Labor Department began keeping records in the 1950s, the only other time that the cuts were so steep was in the harsh 1981-2 recession.

Yet, the Republican leadership in Washington has turned its back on the states at almost every turn. This summer, the GOP held up President Obama's state aid package (one designed to save an estimated 300,000 jobs) for weeks. Minority Leader John Boehner led the Republican attack in labeling the Medicaid and jobs assistance a "bailout" for Democratic "special interests." And now, as ThinkProgress, Reuters and the Wall Street Journal detailed, Republicans plan to block the extension of the popular Build America Bonds (BAB) program that helped boost state and local governments:

If the BAB program is allowed to expire on Dec. 31, ending the sale of those federally subsidized, taxable securities, state and local governments would issue more tax-exempt long-term debt. To attract buyers, issuers would have to have to offer higher interest rates at an inopportune time as they struggle with diminished tax revenue and growing budget deficits.

Leading the charge this time to punish Democratic-voting states and their public employee unions are the usual suspects. In the House, Wisconsin Rep. Paul Ryan incoming Oversight and Government Reform Committee chairman Darrell Issa "have introduced a bill that would require state and local governments to estimate the size of public pension liabilities if their assets earned a more conservative rate of return than many plans currently expect. Failure to do so would result in the suspension of their ability to issue tax-exempt bonds." And on Facebook, former Alaska petro-state governor Sarah Palin asked, "Do insolvent states actually believe other states should bail them out?"

American taxpayers should not be expected to bail out wasteful state governments. Fiscally liberal states spent years running away from the hard decisions that could have put their finances on a more solid footing. Now they expect taxpayers from other states to bail them out, which will allow them to postpone the tough decisions they should have made ages ago and continue spending like there's no tomorrow...
Instead of coming to D.C. cap in hand asking for more "free" money, they should follow the example of their more prudent sister states and take the necessary steps to sort out their own finances. They must start by reforming their insolvent pension systems. Many states have multi-billion dollar unfunded pension liability problems that they have refused to address for many years. They've deferred their spending problems, assuming the problem deferred would be an issue avoided; instead, it's resulted in a crisis invited. These states still won't reform their costly defined benefit systems for fear of offending the powerful public sector unions.

As with their threat to commit national economic suicide by refusing the raise the federal debt ceiling, Republicans are playing chicken with America's financial future. California, Illinois and New York alone account for 25% of U.S. GDP. And as the Washington Post explained, they are not alone in facing staggering budget shortfalls:

In addition to Nevada, states such as Illinois have projected shortfalls of more than 30 percent of their general funds...
States projecting shortfalls of 20 percent or greater in the 2012 fiscal years include New Jersey (26 percent) and North Carolina (20.3 percent), while Illinois' midyear gap in its current budget tops the list at a projected 47 percent of its general fund.

Not all Republicans are so determined to see the states fail. While he opposed the grants to states included in the original $787 billion stimulus bill, Senate Minority Leader Mitch McConnell argued in January 2009, "It might make sense to lend the money to the states that will make them spend it more wisely." (In July, former Clinton administration official Christopher Edley took McConnell up on his proposal, calling for "Congress should pass legislation that would allow a state to simply get an 'advance' on these future federal dollars expected from entitlement programs [which] could then be used for regional stimulus, to continue state services and to hasten our recovery.")
But as in their crusades against public employees and the debt ceiling, this Republican game-of-chicken is designed to punish Democrats and their constituencies. So what if Sarah Palin's Alaska simply transferred the state's petro dollars to taxpayers, led the nation in earmarks and is one of the perennial per capita leaders in appropriating federal spending? As she said in her farewell speech to the Sourdoughs and Cheechakos:

We can resist enslavement to big central government that crushes hope and opportunity. Be wary of accepting government largesse; it doesn't come free. And often, accepting it takes away everything that is free. Melting into Washington's powerful, care-taking arms will just suck incentive to work hard and chart our own course right out of us. And that not only contributes to an unstable economy and dizzying national debt, but it does make us less free.


Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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