No easy solution is available in the state budget office’s toolbox to prevent legislators from having to make some difficult and unpopular decisions this year. Across the country, state legislators blame decreased tax revenues as the cause of their budget woes, but in fact the recession has illuminated the underlying problem of state spending increases funded by debt and accounting gimmicks rather than real revenue.
This habit harms taxpayers just as irresponsible personal finance harms individuals—consumers can finance personal spending with debt; however, a large portion of their future income will be dedicated toward paying it off, plus interest. The American taxpayer will be doing the same for years to come, because state lawmakers have spent beyond their means. For example, Oregon voters recently elected to increase taxes rather than cut education funding—they now pay more money for the same level of services, because such a large portion of their tax dollars are financing the state’s debt.
Many states have reduced spending with government employee furloughs and widely publicized layoffs in the last year. This is only a short-term strategy, and it comes at a high cost to taxpayers who face sharply reduced public services. By minimizing redundancy and waste within state bureaucracies, legislators can find ways to ease their budget shortfalls without cutting valuable services.
This problem is not a Democrat issue or a Republican issue—regardless of party politics, state leaders want to give their constituents more than they pay for. Unfortunately, national headlines reveal: the tipping point is here.
Since the 1990s, states have been expanding their service provisions while attempting to avoid tax increases. As with any other bank account, outflow cannot continually exceed inflow in state coffers. Bills from past spending are coming due, and taxpayers will pay for these mistakes.
Each state, excluding Vermont, has a constitutionally mandated balanced budget. For decades, states have been avoiding this constraint with fiscal gimmickry by making their budgets appear balanced when they are not. The worst offenses include: rolling payments over into future fiscal years, borrowing from trust funds such as pensions, and making rosy predictions about revenue growth that cause budgets to deceptively appear balanced.
These gimmicks have pushed state treasuries to the limit. If there is any hope for a fiscally sound future, state officials across the country must be willing to either cut spending or increase taxes to a level that will cover expenditures. State lawmakers should be weary of higher taxes, because all state revenue must come from residents, businesses, and tourist. By raising taxes, state lawmakers encourage people to take their business elsewhere, pushing jobs to other states.
Arizona is suffering from one of the most severe budget gaps in the country of nearly $5 billion. To combat it, the state is undertaking drastic measures to increase revenue and decrease spending. State lawmakers are engaging in cuts that taxpayers will feel immediately, such as closing state parks. An alternative approach would be to sell state parks to private firms to undertake their management—an option that would help to close the budget gap from both sides of the ledger, rather than relying on spending cuts alone. Private ownership would place these treasured places under improved management, keeping them open for enjoyment at no cost to the public.
California has attracted more attention than any other state. As their deficit approaches $40 billion, this is a small wonder. Gov. Schwarzenegger recently faced criticism from the state Legislative Budget Office for promising that expenditures on prisons would never outpace schools. The analysts made a valid point that comparing expenditures across categories is irrelevant. Regardless, the state has taken an important step toward lowering prison expenditures by adopting one of the nation’s most liberal drug policies, choosing not to waste money prosecuting victimless crimes. Every state should take a cue from California in this policy area.
While Schwarzenegger’s rhetoric demonstrates that cutting education spending is always politically unpopular, many states have cut teacher positions in the last year. In Hawaii, legislators instituted 17 furlough days this school year, significantly reducing students’ classroom time. By tackling inefficiencies in administration, lawmakers could help their school systems save tax dollars without impacting the level of service. Hawaii ranks 14th in per pupil spending but 47th in test scores—this disconnect comes from well-documented excessive spending by state’s Department of Education. A private firm would never survive with such disparity between costs and output, but unfortunately for Hawaii’s school children, state bureaucracy does not operate with such efficiency.
Provided that Washington does not continue down the path of using “stimulus” to subsidize poor state budgeting practices, states will be forced to cover their expenditures, including interest on debt, with local revenue. Lawmakers must remember that while no one likes to see public services revoked, each state has room to save money and improve efficiency by looking for government waste in all departments and programs. This will provide constituents with the sustainable services that they deserve without jeopardizing private investment that generates state revenue. State lawmakers can save money, improve efficiency, and solve their budgets’ underlying problems by diagnosing and eliminating waste.
Emily Washington is a master’s fellow in economics at the Mercatus Center at George Mason University.