The massive budget problems facing most state governments today are a microcosm of the budget problems that will be confronting the federal government tomorrow. So, as they address their own problems, states are providing Washington with an important set of lessons.
First, the economy matters.
In Washington, conservatives love to bemoan the deficits that Washington has run up under President Obama, but they downplay the leading cause – the deep recession which caused federal revenues to collapse. That’s the main reason that the federal deficit soared from $459 billion in fiscal 2008 to $1.4 trillion a year later – not the return of "big government," as Obama’s critics would have us believe.
Leading conservatives ignore the same reality at the state level. In Sunday’s Washington Post, columnist George F. Will deplored the state of state finances without noting that the recession caused state revenues to fall at an alarming rate. As the New York Times explained in an editorial yesterday, "over the past two years, combined sales, personal and corporate taxes have fallen by more than 10 percent."
By ignoring the reality of falling revenues in generating deficits, conservatives can ignore the role of revenues in addressing them – which leads to the next point.
Second, revenues matter.
Conservatives in Washington often decry the deficit as a "spending problem," and they largely dismiss the notion of raising taxes to address it. Obama’s bipartisan fiscal commission, another commission created by the private Bipartisan Policy Center, and mainstream budget experts of the right and left all believe tax increases must be part of a deficit-cutting effort. But this has not swayed most inside-the-Beltway conservative lawmakers.
At the state level, where governors and legislators face budget-balancing requirements, officials of both parties have recognized they must combine spending cuts with tax increases in order to close their budget gaps. While 46 states have reduced services, more than 30 have raised taxes as well, some significantly, to address their deficits, the Center on Budget and Policy Priorities reports.
Third, health and pension benefits matter.
In Washington, many liberals are too quick to call for tax increases and defense cuts and to shift attention from the main drivers of long-term deficits – the soaring costs of health and pension benefits that show up on the federal books in the form of Medicare, Medicaid, and Social Security.
The states have a similar problem – one they share with local governments – without the luxury of ignoring it. That’s the pension and health benefits they owe to their employees. Combined, these plans have unfunded liabilities of at least $3 trillion, the vast majority of them at the state level.
As states are coming to realize, budget stability must include pension and retiree health reform of some kind. It’s a lesson Washington must take to heart if policymakers ever hope to restore long-term federal fiscal sanity.
Fourth, real action matters.
Recognizing a fiscal problem is one thing, facing up to it is sometimes quite another. To be sure, most states have taken real action of some kind. Nevertheless, the New York Times reported that Illinois wants to sell its bills to Wall Street in exchange for cash, while New York and New Jersey are shortchanging their pension funds.
All of that may be financially convenient and politically irresistible, but it’s obviously unsustainable. States have to seriously address not only their short-term problems, which budget-balancing requirements force them to do, but also the growth of pension obligations that burden them over the long-term.
Tax increases. Cuts in pension and health benefits. And, of course, reductions in other spending wherever possible. That’s an appropriate formula not just for the states today, but for Washington tomorrow.
Lawrence J. Haas is former Communications Director to Vice President Gore and, before that, to the White House Office of Management and Budget. He's now a public affairs consultant who writes widely about foreign and domestic affairs, including fiscal policy.
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