Earlier this month, President Obama announced his desire for a second bailout of state governments to the tune of $50 billion. The president argued that the “emergency package” was necessary to stabilize state budgets and avoid cuts to public employee payrolls. Conservatives rightly rejected the proposal, citing the need for states to operate under the “new normal” – smaller, more efficient government reflective of the fact that overspending in periods of economic growth led to budget growth of unsustainable proportions. Spending cuts, public employee compensation reform, and targeted privatization are the proper methods for bringing state spending in line with reality. Allowing the federal government to artificially prop up state budgets merely kicks the can down the road to the next crisis.
The same argument can be made at the state level, where centralized state governments often shovel tax dollars to localities to fund day-to-day operations. Some states, facing obligatory budget cuts, are reducing general fund payments to municipalities and asking them to accept that services must be streamlined and some local government functions must be consolidated by virtue of economic necessity. Unfortunately, among conservatives there is debate as to whether such spending cuts constitute local tax increases. It should be clear that this is not the case.
The best example of such an argument exists in New Jersey, where Gov. Chris Christie has proposed a budget $1.5 billion smaller than its predecessor. Much of the savings comes from a $840 million reduction in school aid and a $420 million cut in state aid to localities. Some on the right argue that these cuts mean automatic increases in local property taxes. This is problematic for a number of reasons.
First, it assumes that local governments in New Jersey exist at their optimal sizes. To say that property taxes must be increased to compensate for a loss in state aid is to contend that local governments are incapable of budget cuts, privatization, and consolidation. This is not an argument that conservatives tend to make, especially in such a general sense. The economic crisis of the past three years is not one that should be solved by throwing more money at the problem. Gov. Christie’s cuts in local aid are principled solutions to an overspending problem at all levels of government.
Second, the argument against these budget cuts ignores the simple fact that Gov. Christie has taken a proactive step to curb the growth in property taxes. He has proposed a constitutional amendment to limit the annual growth in property taxes to 2.5 percent. The governor saw the potential impact of his cuts in the form of automatic property tax increases and included a provision to stop it. Those arguing that property taxes will continue to skyrocket ignore this fact. They also forget that under the current model of state government using income tax revenues to limit property tax growth has failed in New Jersey. Property taxes in the Garden State are higher per capita than anywhere else in the country.
For conservatives to argue that reductions in state aid to localities constitutes a tax increase is the same as claiming an end to the stimulus package means automatic tax increases at the state level. We do not make that claim because it presents a false choice. The federal government should not prop up state budgets any more than state government should prop up localities. Municipalities, like states, should balance their own budgets by spending within their means, rather than looking to their big brother to bail them out.
Joshua Culling is state affairs manager at Americans for Tax Reform, which fights for lower, flatter and fairer taxes. He coordinates ATR’s advocacy efforts in 17 states.