States Are in Trouble

From Today’s WSJ: States Slammed by Tax Shortfalls

The stumbling U.S. economy is forcing states to slash spending and cut jobs in order to close a projected $40 billion shortfall in the current fiscal year.

…Unlike the federal government, most states are required to balance their budgets. Most have so far resisted tax increases, instead opting for raising prices on things like tolls and college tuition, and cutting back on services like education and health care. Some chose one-time measures such as tapping rainy-day funds that were built up in flusher times.

The housing slump, now well into its second year, is the primary culprit. The decline in home sales has cut into real-estate transfer taxes. Construction spending and employment has declined. Fewer home sales have resulted in lower sales of home furnishings and washing machines, eating into sales taxes.

Of course, for many states, today’s budget woes stem at least partly from expanding their services during good times and not planning enough for the inevitable downturn.


Ahh! The last sentence is only partly true: I would say that at least 95% of the state’ budget woes stem from expanding government too much in the good times of the past few years. This is cold and cynical but here’s my analysis of the current situation:

Many states (New York, New Jersey, California, Maryland, Massachussets all come to mind) have horribly irresponsible governments. These states are run by liberals who use any chance they get to increase the size and scope of the state government. They got their chance too: all of these states participated in the housing bubble. This created a temporary surge in tax revenues. These states increased services and made promises with the expectation that the good times would last forever. Anybody with half a brain (much more than anyone in the New York State Senate has) could have seen that this was a bubble and was not going to end well.

Now that the shit is hitting the fan and the bubble is busting, legislatures in these states are acting like their problems were inevitable. The irony is, if these states raise taxes and fees, they will further encourage the people who live there to get out and move to more responsible states where taxes are lower.

The tendancy of democratically elected governments to overspend (and over-promise) in the good times is a key reason why inflation/debasing of the currency is a virtual guarantee.

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