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The Problem with State Budgets

October 15, 2015

While working as a State Policy Intern at Americans for Tax Reform, I watched dozens of states debate and enact their FY ’16 budget. One thing quickly became clear in watching these budget fights: there is never enough money to meet the budgetary needs.

By Nathaniel Rome C’18

Why not? Many states entered the budget season facing a large deficit. Perhaps they overestimated tax revenue, like oil rich states such as Alaska[1] that were shocked by plummeting oil prices. Or perhaps they had balanced last year’s budget on short-term funding sources – or gimmicks – and are now facing the consequences. Other states had overzealous political leaders who were eager to institute their own new pet project. Large healthcare[2] and education[3] overhauls in some states required additional sources of revenue to fund them. And in most states, the growth of existing programs – such as pensions for public employees[4] and Medicaid contributions[5] – grew far faster than revenue growth.

In light of this, legislators were forced to make important decisions on what government programs to fund, and how to fund them. More taxes? Government cutbacks? Structural reform? The answer is not clear and tensions run high as the different parties defend their position.

One way I approached the problem was to look at the growth of government spending on a state level. A reasonable rate of spending growth would reflect changes in inflation and population, so as to maintain the same real dollar spending per capita. If a state is lagging behind this, then government spending is not keeping up with population and inflation changes, and if the state is blowing past these caps, then it is overspending. I crunched the numbers for cumulative state spending in all 50 states in the last decade of available information (1999-2008). The orange line represents how spending would increase if it changed with inflation and population growth only, with 1999 as a base year. The blue line is actual spending over that time.


National Overnight Spending 

(Source: U.S. Census Bureau, Tax Foundation)

The trend across all 50 states is clear. There has been an incredible level of overspending. Hundreds of billions of dollars have been spent by state governments beyond the reasonable population/inflation level. And there’s no end in sight.

But of course spending varies state-by-state. So, to get a more comprehensive understanding, I broke the data down state-by-state, to see who the worst offenders of overspending were. The Overspending Percent is the total amount of spending that exceeded the population/inflation limit divided by the total spending allowed under the population inflation limit. The results are below:

State

Overspending Percent

California

36%

Wyoming

33%

Oklahoma

31%

Mississippi

31%

Kansas

31%

Wisconsin

31%

South Carolina

27%

Rhode Island

27%

Florida

27%

Maine

26%

New Mexico

25%

Indiana

25%

Colorado

24%

Nebraska

24%

Vermont

24%

Pennsylvania

24%

Kentucky

23%

Illinois

23%

Louisiana

23%

Ohio

23%

Maryland

23%

Arkansas

23%

Minnesota

22%

New Jersey

22%

Missouri

22%

Arizona

22%

Delaware

22%

North Carolina

22%

Iowa

21%

Alabama

21%

Idaho

20%

Texas

20%

Tennessee

20%

Michigan

19%

Montana

19%

New York

18%

Alaska

18%

Virginia

16%

Washington

16%

Georgia

16%

North Dakota

16%

Massachusetts

16%

South Dakota

16%

Hawaii

15%

West Virginia

14%

Oregon

14%

Connecticut

14%

Utah

12%

New Hampshire

9%

Nevada

8%

(Source: U.S. Census Bureau, Tax Foundation)

As you can see, every state significantly overspent. California unsurprisingly leads the pack by spending 36% more than a reasonable level. More than half overspent by 20%, and all but two overspent by at least 10%.

The implications of this is clear: spending is the problem. The cause of overspending varies from state to state, but it is crucial that all states identify the cause of runaway spending growth and determine how to mitigate it.  For many states, pension reform[6] is a politically tough yet fiscally responsible step. Pennsylvania, which is leading the way in pension reform, is in a budget showdown that threatens the reform effort. In other states, line-item vetoes[7] save taxpayers hundreds of millions of dollars, like in Florida this year. School choice programs[8], implemented in several states over recent years, have the potential to save money and improve educational opportunity. Criminal justice reform[9] is also an initiative embraced by many states.

Next year, like this year, legislators across the country will likely try to raise your income tax, sales tax, corporate tax, severance tax, tobacco tax, e-cigarette tax, property tax, gas tax, or any one of the seemingly infinite ways your state government taxes you. When legislators demand more and more taxes to fund their budget proposals, keep a healthy degree of skepticism. There is not a budget deficit because you are taxed too little. The budget deficit exists because of the unsustainable appetite of government spending.

 

  [1] Dermot Cole, “Falling oil prices, revenue forecast paint gloomy picture for Alaska,” Alaska Dispatch News, December 10, 2014, http://www.adn.com/article/20141210/falling-oil-prices-revenue-forecast-paint-gloomy-picture-alaska

  [2] Dave Boucher, “Haslam/s Tennessee Plan would expand health coverage,” The Tennessean, December 15, 2014, http://www.tennessean.com/story/news/politics/2014/12/15/haslam-expanding-medicaid-in-tennessee/20428655/

  [3] Eleanor Chute, Mary Niederberger and Bill Schackner, “Wolf delivers on his promise to boost Pennsylvania Education Spending,” Pittsburgh Post-Gazette, March 4, 2015, http://www.post-gazette.com/news/education/2015/03/04/Wolf-delivers-on-his-promise-to-boost-Pennsylvania-education-spending/stories/201503040063

  [4] Global Credit Research, “Moody’s: Colorado’s pension costs and funding gaps keep growing despite benefit reforms,” Moody’s Investor Service, March 12, 2015, https://www.moodys.com/research/Moodys-Colorados-pension-costs-and-funding-gaps-keep-growing-despite–PR_320627

  [5] Nathaniel Rome, “Obama Administration Significantly Underestimated Impact of Woodwork Effect on Medicaid in States,” Americans for Tax Reform, July 14, 2015, http://www.atr.org/obama-administration-significantly-underestimated-impact-woodwork-effect-medicaid-states

  [6] James Comtois, “Pennsylvania governor vetoes pension reform plan to put new employees in DC plan,” Pensions and Investment Online, July 9, 2015, http://www.pionline.com/article/20150709/ONLINE/150709891/pennsylvania-governor-vetoes-pension-reform-bill-to-put-new-employees-in-dc-plan

  [7] Paul Blair, “Florida Governor Rick Scott Cuts Spending and Taxes in 2015,” Americans for Tax Reform, June 24, 2015, http://www.atr.org/florida-governor-rick-scott-cuts-spending-and-taxes-2015

  [8]Lyle Brennan, “School Choice Bill: Congratulations Governor Brian Sandoval & NV Legislators,” Nevada Business, July 1 2015, http://www.nevadabusiness.com/2015/07/school-choice-bill-congratulations-governor-brian-sandoval-nv-legislators/

  [9] Tierney Sneed, “What Texas Is Teaching the Country About Mass Incarceration,” US News and World Report, November 19, 2014, http://www.usnews.com/news/articles/2014/11/19/texas-georgia-mississippi-set-conservative-example-for-criminal-justice-reform

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  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

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