On July 14th, the IRS held a public hearing for the debt-equity rule (section 385 of the IRS code) that the Treasury Department proposed last April. The hearing, which had as many as 16 speakers from various industries,...
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- CBPP Oblivious to Real Causes and Solutions to State Budg...
CBPP Oblivious to Real Causes and Solutions to State Budget Crisis
Jon Shure at the Center on Budget and Policy Priorities argues that blaming states for their overspending isn't a solution to the pickle they're in now. Fair enough, but as someone who doesn't want to let California and Illinois and others off the hook for their fiscal distress, I feel compelled to respond.
"The blame game" is vital when there are those who claim states did nothing wrong. It's vital to understanding what the solution should be. States need to reprioritize what they do, pare back on unwise commitments made during the boom, and provide only those services that their citizens are willing to pay for.
Pushing, as CBPP does, for more federal aid or for temporary tax increases doesn't address the structural deficit, caused by ratcheting up spending commitments during the boom.
Shure asserts: "[S]tate tax revenues have fallen more in this recession than at any time in at least the past 45 years." That's true, but it only shows how unsustainably high they got in the boom. The drop is not that dramatic when you see what the run-up was:
Shure again: "States entered the recession with their largest budget reserves in history, totaling $69 billion or 10.5 percent of their general fund budgets at the end of fiscal year 2007." Also true. But he leaves out academic studies that argue prudent rainy day funds should be somewhere in the teens, so 10.5% is still too low to weather a typical downturn. Also, the budget reserves were not evenly spread, with Texas and Alaska saving much more than most other states ($12 billion out of the $68 billion unexpended). According to reports from the National Association of State Budget Officers, in FY 2007 (the year Shure cites), 17 states put aside less than 10% with 10 of those putting aside less than 5%.
Shure cites general fund spending trends, but that leaves out lots of spending and therefore gives an incomplete picture. I will concede that spending is lower now than the height of the boom, although that should be true by definition.
Shure has an alarming graphic, showing the plunge in state and local employees over the last two years. Again, that just shows how unsustainably high the commitments were during the boom. If you show the full business cycle, it doesn't look like a bloodletting at all:
Shure seems to think that tax cuts caused underfunding of pension plans. I'm not sure if he's read studies from the Pew Center, ALEC, the Manhattan Institute, the Institute for Truth in Accounting, and others that seem to think the bigger problem is defined-benefit plans, unrealistic growth assumptions, benefits so generous to be impossible to provide, and abuses like double-dipping and last-day promotions. Shure does applaud recent steps by some states to "make money-saving changes" in their pensions, and I hope CBPP will join the effort to transition them to defined-contribution plans.
This is not to say that things aren't tough right now. They are. But the person on the street knows that writing blank checks to California's government isn't going to do anything for economic recovery. When everyone from queens to G-20 prime ministers to most Americans think it's time to cut unnecessary and unproductive spending, maybe CBPP should get on board.
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