The state budget situation is getting uglier by the day. It’s pretty much a full-blown crisis at this point – and that’s including the federal stimulus aid that was shamefully cut by the Senate “centrists.”
The budget crisis is not, however, some sort of freakish one-time event. It’s a recurring problem that points to a larger institutional failure of our state government system. Simply put, states don't work because they are chronically underfunded. And to me, this failure is rooted in tax policy. Our state governments are simply (1) unwilling and (2) unable to collect a sufficient amount of tax revenues for their residents’ needs.
First, the “unwillingness.” The politics of tax policy are stuck in a very harmful place at the moment. The sustained conservative assault on taxes has been extremely successful, and has thoroughly penetrated our political consciousness. And here’s where it’s left us: The GOP won’t even consider raising taxes on anything. And the Democrats barely have the courage to raise taxes even on the very well-to-do.
And look, taxes suck. No one likes paying them – including me. But that said, society has a set of needs that people expect government services to meet (e.g., education, senior health care, security). Many Americans are (rightly) unwilling to give up those services, but they simultaneously punish efforts to pay for them.
At some point, the politics on this issue has to change – that is, we must come to terms with our need to raise more tax revenues. A conservative might respond, “no, we need to get spending in check.” But that’s not really the problem. Just look around at the states’ specific problems. Their budgets are already cut to the bone. And it's hurting our most basic institutions and services.
But even assuming the politics improved, states would still be structurally “unable” to provide sufficient revenues. States are stuck in a classic collective action problem in that they compete for both residents and businesses. As a result, I’m not sure we can realistically expect states to provide what Americans need even if the politics got better.
The larger implication is that we should rely less on state governments to provide basic services (or at least to fund them). On social issues, I’m all for states’ rights and localism. But federalism just doesn’t make much sense on the economic and regulatory fronts. States are structurally unable to provide the revenues required, and there’s no real reason to think this dynamic will improve.
I’m not sure what the ultimate policy implication would be. Maybe the federal government should set some sort of “floor” tax rate that states could then go above, but not below. But in any event, it seems that the more we depend on the federal government to establish overall tax rates, the better.
Federalism in the economic realm just doesn’t work.