Monday, January 7, 2002
New Report: Crisis in State Spending
State Budgets Grew By 63 Percent In 1990s
WASHINGTON, Jan. 7. 2002 -- U.S. Newswire -- State lawmakers
increased spending by 63 percent on average during the economic boom of the 1990s, says a new report issued
by a bipartisan organization of state legislators. Many state governments now
face serious budget deficits as economic growth and tax receipts are widely outpaced by government
"State governments have not lived within their means during
the last decade," said Oklahoma Senator Jim Dunlap, ALEC's National Chairman. "Families in America manage to live within
their means. Government must live within its means as well."
The new report entitled, Crisis in State Spending: A Guide
for State Legislators, offers a timely and candid look at the real reasons underlying the current fiscal crisis in nearly
every state capital in America. Published by the American Legislative Exchange Council (ALEC),
the Crisis in State Spending report offers state legislators a remedy to the
current crisis, while providing several tools to responsibly manage future economic growth and spending.
According to the report, roughly two of every three surplus
dollars into state coffers since 1996 has gone to new spending, not to tax reduction. If states had limited spending increases
to the growth in population and inflation, states could have cut taxes by $300-400 per
"Since the states spent so much in the past decade, they
should look to spending cuts, and not tax increases, to restore balance to their budgets," said Dunlap.
The new report offers several policy tools for legislators
to responsibly manage future economic growth and spending. These measures include truth in forecasting, independent
revenue forecasting, a tax and expenditure limitation act, a truth in spending act, a
competitive contracting of public services act, and many more.
"This handbook is designed to aid lawmakers in deliberations over the coming years that will
surely include debates on unnecessary tax hikes," said Chris Atkins, editor of the report
and ALEC's national director of the tax and fiscal policy task force.
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"Crisis in State Spending:
A Guide for State Legislators"
By Dr. Richard Vedder
Download Full Report:
State and local governments are now paying for their fiscal
sins of the past decade. State and local spending rose sharply in the ten years between the last recession and the current
period of economic sluggishness. Ordinarily, in good times, government spending falls in relationship
to our national income. Yet state and local spending has still grown by robust
amounts despite the record economic expansion. This handbook documents this phenomenon,
discusses some of its consequences, and outlines some strategies to alleviate this problem in
the future. Therefore, it offers a blueprint for fiscal redemption.
Recent data from the Bureau of Economic Analysis at the U.S.
Department of Commerce shows that in the last three years of the decade of boom (1998-2000), state and local
spending in real (inflation-adjusted) terms never rose less than three
percent a year and nearly matched the growth in personal income. Thus, the economy did not benefit from what
economists call "reverse crowding out," a growth in the private sector
brought about by a reduction in the percentage of our resources taken by state and local government. Ironically,
the federal government, often the villain in matters of fiscal policy, did
shrink relative to the whole economy during most of the 1990's, providing resources for the expansion of the
private economy that propelled the nation into unprecedented peacetime growth.
The experience in 2001 is even more startling. In the first
two quarters, when the economy was showing almost no growth, real state and local government spending rose by 6-7
percent. This heightened governmental command over resources crowded out
private sector activity. At the same time, state and local revenue growth began to decline, leading to cash
flow problems in some states and a looming fiscal crisis.
Why did state and local governments not constrain their
spending? During periods of rapidly rising income and wealth, complacency sets in. As state revenues rose rapidly, it became
easy for politicians to avoid hard choices and capitulate to the pleas of "rent-seekers," groups
trying to enhance their own wealth through government spending and subsidies. They could
approve generous increases in spending for schools, universities, parks and recreation,
prisons and jails, etc., and still have money left over for small tax reductions.
Because state and local tax collections usually rise faster than income itself (due to the progressive nature of
income taxation), it is possible to make small tax rate reductions and
still keep spending growing as fast as income.
Moreover, taxpayers, who usually pressure legislators for
some tax relief, became less demanding. With rapidly rising wealth from the stock market, combined with high
employment and wages, citizens were less militant in insisting that excess tax
revenues revert back to them. Political leaders, reflecting the popular mood, fought less passionately than
usual for tax cuts, deciding to "live and let live." ...
Winston Churchill was correct in saying that "democracy is
the worst form of government - except all others." While we would not have any other form of government, one of the
defects of representative democracy in modern industrial societies is that special interest
groups can take advantage of what some scholars call "rational ignorance." Whenever we
consider, say, a stadium subsidy for a given city, the interests who would
gain a lot from that subsidy will lobby the legislature vigorously to have the spending approved. For example, the
local Chamber of Commerce, construction companies building the stadium, expected
operators of concessions, hotel interests, and the owners of the sports teams themselves will
spend large sums of money on lobbying and political contributions. Meanwhile, the
overwhelming majority of people burdened by the public expense will be less vocal, since
individually they lose only a little bit. The benefits of the spending are
concentrated among the few, but the costs are dispersed among the many. The few who gain fight the political battles
harder, and often win, leading to bad public policy that provides large
benefits for the rent-seekers who gain....
... Just as families have learned to live with less, and
private businesses have reduced staff and cut expenses, state and local governments must also slim down, becoming leaner and
As mentioned above, in recent years real state and local
government spending rose substantially. The fiscal crisis that many states are facing is clearly self-inflicted, and was not
avoided by constitutional means since most states lack constitutional methods of restraining
taxing and spending. So now politicians are saying "We don't have enough money to
operate, and are running deficits. We need to raise taxes to cover these deficits." This argument must
be rejected. There are at least four ways of closing budget deficits that are
infinitely superior to raising taxes....
The decline in revenue associated with recession is
temporary, and should not be replaced by a permanent revenue source such as new or increased taxes....
There are two other less desirable means of financing, but
still preferable to tax increases. The first is borrowing. States first should deplete their rainy day funds ...
Not all taxes are equal in terms of the damage they do.
Sales taxes, for example, are relatively benign, while income taxes have sharply detrimental effects. In the 1990's, nearly
three million native born Americans left the 41 states with general income taxes for the nine
states that allow individuals to keep the fruits of their productive labors....
... My research says that economic growth is likely to be
greater, other factors the same, in the state with the low marginal rate flat tax. When marginal state and local tax rates
on income get to 9 or 10 percent, as they do in states like California and Ohio, they drive highly
productive individuals to consider moving to states like Texas and Florida where the
top rate is zero....
Legislators and state officeholders are human, and therefore
they respond to incentives. They listen to the persons who yell the loudest and give the most money to their campaigns. The
special interests are able to take advantage of rational ignorance. The result of this process is
often bad public policy. Therefore, there is a tendency for government to grow
larger than what the public really views as optimal....
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