25th June 04:27
Deficit, Guess who's to blame?
D Is for Deficit
Guess who's to blame for state budget problems?
BY KEVIN HASSETT Monday, October 6, 2003 12:01 a.m. EDT
A revolution is brewing in California, sparked by an annual state
budget that is a stunning $38 billion out of balance. States like
Connecticut, New Jersey, New York and Oregon face similar, though
lesser, fiscal crises. What has happened to state budgets in these
places? And who is to blame?
Democratic Party officials have tried hard to "nationalize" this
problem, and have received assistance in this regard from much of the
national media. If you listen to the Democrats' line of argument,
today's state fiscal crisis was caused by coldhearted Republicans who
choose tax cuts over "adequate" funding of "essential" state programs.
Without prospect of federal help (thanks to President Bush's tax
cutting parsimony), state taxes must now be increased to support
"necessary" services. And if taxes are not increased fast enough,
terrible cuts in spending must also be contemplated. This is not only
cruel to the "vulnerable" but also puts the entire economy at risk.
The negative drag from state spending cuts may hurl us into another
recession, the New York Times argued recently.
This may sound plausible enough. But almost nothing about it is true.
The California story is actually quite straightforward. During the
1990s boom years, Gov. Gray Davis found his state revenues surging
along with the stock market. He responded by jacking up government
spending almost 40%. When the stock market and economy softened,
revenues were no longer sufficient to maintain that sharply higher
level of spending. The gigantic fiscal crisis that ensued created a
media frenzy and a historic vote on recalling the governor.
As for the idea that state spending is being slashed--it's true that
legislators in many places are having to tighten their belts--but it
is only huge planned increases that are being cut. Even after all of
this year's "cuts," state government spending will be 2% higher in the
current fiscal year than it was in the previous year. If total
spending is still rising, how can Democratic National Committee
chairman Terry McAuliffe and the New York Times claim this is going to
drag down our economy? Could politics be involved?
The 10 states with the worst deficits per capita State Deficit per
capita 2000 vote
California $985 D
Connecticut $679 D
New Jersey $664 D
New York $626 D
Oregon $615 D
Massachusetts $568 D
Minnesota $542 D
Wisconsin $436 D
Maine $400 D
Delaware $372 D
Source: Sean Gupta, AEI
To help uncover whether today's state budget crisis is more
attributable to "irresponsible Republican tax cuts" or "irresponsible
Democratic spending," I recently ****yzed individual state budgets in
light of those states' political complexion. I began by dividing the
states into those that voted for President Bush, which I labeled as
predominantly Republican, and those that voted for Al Gore, which I
Separated out that way, the state budget data tell a striking story.
Though the total population of Bush and Gore states are almost
identical, the states that voted Democratic account for fully 70% of
today's state deficits; Republican states ring up only 30% of the
total. And of 10 ten states with the largest per capita budget
deficits (see nearby table), every single one voted Democratic in the
last presidential election. (Alaska, which finances its government
from oil revenues rather than taxes on its citizens, was excluded from
What does this suggest? It suggests that Republican economic policies,
particularly the taste for tax cuts, cannot fairly be blamed for
putting states in economic peril. It suggests that Democratic economic
policies, particularly the tendency to increase spending, are the
major force behind today's imbalances.
The more one studies the state data, the clearer this becomes.
Consider that in the top 10 deficit states (again: all Democratic) tax
revenues increased at the dramatic rate of about 5% a year over the
last decade. With all that revenue growth, why did those states build
up deficits? Because spending was allowed to grow even faster.
In contrast, in the 10 states that are most fiscally sound today, tax
revenues grew only 1.5% a year over the previous decade. How could
such "anemic" tax flows yield economic health? Through careful
The differences between the healthy states and the sick states are
striking, and they belie all the New York Times-style truisms about
what lies behind state fiscal health. Consider that the average tax
revenue per person in today's sickest ten states was $2,445 in the
last data available--compared to only $1,923 per person in the 10
healthiest states. This blasts out of the water the idea that states
get sick because they have been starved of revenue; indeed it shows
One could hardly attribute today's state deficit problems to "reckless
tax cutting." If anything has been reckless, it is spending.
Democratic elected officials in particular seem to have shown too
little regard for taxpayers' money. Taxes have increased, but spending
has increased more, and citizens are waking up to find themselves
heavily burdened and in debt. The result is another taxpayer revolt in
California, and perhaps in other staunchly Democratic states. Whatever
their rhetoric, the record shows that Democrats are still the party of
Republicans are not invulnerable to a spending backlash, though.
During the last national taxpayer revolt in the early 1980s, Ronald
Reagan increased defense spending but cut nondefense spending sharply.
President Bush, on the other hand, has increased spending on just
about everything. Three of the five biggest increases in federal
spending in U.S. history occurred during Mr. Bush's first three years
in office (the other two took place during World War II). This
than it was when Mr. Bush took office. And if the prescription drug
plan favored by the president is enacted into law, Republicans will
have made Gray Davis look parsimonious by comparison.
If the lesson from the states is that voters grow angry when
governments spend far beyond their means, then federal officials
should take notice. Politicians who spend with the same enthusiasm as
Gray Davis may eventually experience the same treatment at the hands
Mr. Hassett is director of economic policy studies at the American
Enterprise Institute. This article appears in the October/November
issue of The American Enterprise magazine.
RESPOND TO THIS ARTICLE READ RESPONSES
E-MAIL THIS TO A FRIEND PRINT FRIENDLY FORMAT
BOOKMARK THIS SITE
3rd July 19:35
Deficit, Guess who's to blame?
In Michigan we just went thru $1 billion
of painful budget cuts. Now Gov. Jennifer Granholm says there will be
approx. an $800 million deficit for the
next fiscal year as well. Losing around
170,000 high paying factory jobs in the
past two years hasen't helped with state income tax revenue that is for sure.
Walmart is expanding in Michigan with
low paying jobs and few benefits but stocked with merchandise made by
slave labor in third world countries that
we have lost jobs to.
Who is to blame. Fingers are being pointed
all over the place. Take your pick.
5th July 05:22
Deficit, Guess who's to blame?
Walmart is expanding because small businesses cannot compete when
strapped with high tax burdens and demands to cover benefits they
Labor is going overseas because regulations, environmental controls
and taxes make it economically defeatist to keep manufacturing in the
Fixing the Market to "solve" a problem is defeating the free market
principles that with success comes benefits and higher wages. Your
golfing buddies may give you that 2 foot put, but the market cannot.
PS: India and China are hardly third world countries. Read +
Comprehend + Understand + Practice