State Government Bailouts: An Opportunity for Tax Reform

Earlier this month, two state governors penned an op-ed opposing a bailout of state governments:

In Texas and South Carolina, we’ve focused on improving “soil conditions” for businesses by cutting taxes, reforming our legal system and our workers’ compensation system. We’d humbly suggest that Congress take a page from those playbooks by focusing on targeted tax relief paid for by cutting spending, not by borrowing.

In the rush to do “something” to help, federal leaders would be wise to take a line from the Hippocratic Oath, and pledge to do no (more) harm to our country’s finances. We can weather this storm if we commit to fiscal prudence and hold true to the values of individual freedom and responsibility that made our nation great.

Some states are hurting right now because of the recession, having exhausted their rainy day funds while facing increased need for social services at a time of declining revenue. That’s perhaps the best-case scenario for a federal bailout. It’s important to remember, however, that many states broke their budgets before the recession, and a bailout would just be a way to get them one more fix (at our expense) before they finally address their problems once and for all.

Nevertheless, the state-local government budget shortfalls, some real and some exaggerated though they may be, present important opportunities for prioritizing vital spending over non-vital spending, and improving tax climates. Too often states try to soak the rich and corporations and consequently have exaggerated budget booms and exaggerated budget busts. Too often states rely on short-term gimmicks like sales tax holidays or targeted tax credits for favored companies, rather than addressing the overall tax burden. Too often states try to pick winners and losers, turning their tax code into an unstable and complex Swiss Cheese. Too often states have no rainy day fund.

These present some ideas that should be kept in mind as state officials come to Washington and to their legislatures with hat in hand. That may be a good time to demand better business tax climates.