Thursday, January 06, 2011

Tax Payers vs. "Tax Eaters."

This week's Economist has a good package on "the battle ahead." Simply put, generous pension and health benefits for public employees must be restructured or states (in the US and across the "developed" world) will go bust.

For those prone to reading grim detail, you can access a Brookings report that addresses this issue in four states of the American West (California, Colorado, Nevada and Arizona).


A moment of reckoning has arrived, after all. During much of the 1990s and again in the mid-2000s, California and the Mountain states had enjoyed years of strong economic growth that had produced what appeared to be robust budgets. This created a fiscal mirage that allowed several of these states to expand public service provision as well as implement permanent tax cuts—with seemingly little thought as to how they might be sustained over the longer term. But now the illusion has been shattered, as the length and depth of the economic downturn has at once created serious temporary or cyclical budget shortfalls in these states (associated with the business cycle) while also exposing the existence of long-term structural deficits that have resulted in large part from starry-eyed decision-making during better times. Such policy choices have now interacted with the base performance of the states’ fiscal systems (i.e. the structure of taxes and expenditures) and broader economic and demographic trends to produce in some cases massive chronic imbalances that have largely been overlooked in discussions of states’ current fiscal health....

Already these states have struggled to close (or nearly close) total budgetary gaps for Fiscal
Year (FY) 2011 that were nothing less than monumental.3 These gaps included: in Arizona, $3.1 billion or 36.6 percent of the final budget; in California, $17.9 billion or 21.6 percent of the final budget; in Colorado, $1.5 billion or 21.6 percent of the final budget; and in Nevada, $1.8 billion or an astonishing 54.0 percent of the final budget. In closing these holes, California has garnered the most attention for its use of a mix of deep spending cuts and a host of one-time maneuvers that balance budgets today but leave unattended the reality of future budget shortfalls. And yet other Western states have themselves deeply slashed aid to public education, state university systems, and social welfare programs while employing their own short-term devices and gimmicks. These include temporary tax increases like the voter-approved sales tax rate hike in Arizona, the sweeping use of idle fund balances across most states, and highly publicized asset sales in Arizona and California.

What is more, now that many of those quick fixes have been exhausted, a starker reality has set in in which deeper-going structural deficits will place continued extreme pressure on annual budgets even as economic health returns—albeit slowly—to the states. The forecast is bleak: With budgets already slashed but overhangs of hundreds of millions of dollars looming, state governments in the West are now going to be compelled to implement huge new cuts to budgets for education, innovation, economic development, health care, and services for the vulnerable, the old, and the young, all the while foisting greater burdens on local governments whose own budgets are in dire straits.