Government is best, its often said (mostly by conservatives seeking to diminish federal authority), when closest to the people and farthest from Washingtons heavy hand. Would that were so. In actual practice, the governmental institutions closest in theory to the people are also those prone to domination by local power structures and narrow economic interests. While state governments, in particular, can sometimes be innovative and responsive, they can just as easily be shortsighted, lacking in perspective, and subject to simplistic solutions and demagogic influences.
The inherent weakness of state government expressed itself with a vengeance earlier this summer when my home state of Maine decided to engage in tax reform. After years of relentless propaganda about the need to improve the business climate, a centrist Democratic governor and legislature repealed the graduated income tax enacted in the liberal atmosphere of the 1960s and replaced it with a Steve Forbes-style flat tax combined with an expanded state sales tax. Rupert Murdocks right-wing Wall Street Journal took immediate notice, hailing the shift as a wondrous, forward-looking development.
Subsequent press analysis of the legislatures handiwork, which will be challenged in a fall referendum, indicated that a majority of the tax savings (52%) would accrue to fewer than 1% of taxpayers 4,456 individuals with annual incomes over $330,000. The states existing tax structure could have been improved by adding brackets at the high end to enhance its progressivity and spread the burden; instead, the peoples representatives, in their wisdom, made it far more regressive. So much for the innate superiority of grassroots democracy.
Perhaps the worst thing about Maines reform is that it was engineered to be revenue-neutral that is, the tax burden has been shifted downward, but the overall dollars coming into state coffers will be roughly the same. This is at a time when Maine, like most other states, needs to generate and spend more money. James Surowiecki, writing in The New Yorker, has pointed out the tragic irony that while the federal government is spending heavily to stimulate an economic recovery (employing a countercyclical fiscal policy to combat a shrinking economy), state governments, faced with revenue shortfalls, are doing the reverse, cutting their budgets in a procyclical manner that essentially negates Washingtons initiatives. The result: Obamas stimulus package may have little or no effect; for every job it creates, state cuts will eliminate one somewhere else.
There is a method, constitutionally mandated, to the states collective madness. With the enlightened exception of Vermont, they are required by law to balance their budgets year in, year out. This allows for little fiscal flexibility or creative public investment. A handful of states are spending anyway Colorado has its own stimulus program to foster employment but most are straitjacketed by their budget-balancing requirements. Since the passage of 49 separate state constitutional amendments to expunge these remnants of 19th-century conventional political morality is unlikely, and since data from the Center on Budget and Policy Priorities (CBPP) indicates 44 states face budget shortfalls in either 2009 or 2010, there are only two serious options: a federal bailout for the states or the raising of state taxes.
Revenue enhancement is necessary, first of all, to forestall state bankruptcies and avoid rampant cuts in essential services, such as Medicaid, or for crucial infrastructure upgrades. Generally speaking, an across-the-board increase in state taxes of the progressive variety seems to make the most sense, and not just to fund current services. States could do a lot to replicate and reinforce federal efforts to fight the recession through public job creation.
Instead, the trend is to retrench; states are using any and all methods, including layoffs and outright fiscal gimmickry, to shave their budgets. As of June, according to the National Association of State Budget Officers, 42 states had already made mid-year budget reductions. The CBPP says 32 of them have already cut spending on education and 21 have slashed money for health programs. Total state spending in 2009 will be down for the second consecutive year, the biggest drop in over three decades. Meanwhile, the conservative publication The Economist goes so far as to call state leaders mini Herbert Hoovers for trimming budgetary outlays in the midst of a recession.
The unwillingness of state governments to step up to their responsibilities during the economic crisis has perhaps its worst manifestation in the area of unemployment insurance, a joint federal-state activity. While Washington pays to administer the various state job-service programs, the states virtually run the UI system, setting the duration and level of benefits, and the level of taxation imposed on employers to support actual payments to jobless beneficiaries. The problem is that the benefits are generally too low, too short-lived, and too restricted eligibility-wise; roughly 60% of out-of-work Americans dont qualify for any help at all. As to the potential for economic stimulus, forget it.
Because unemployment compensation is financed by state payroll taxes on companies, the anti-tax and pro-business mindset in many state capitols means that benefits remain skimpy at best, criminally inadequate at worst. Overall, UI benefits in the US are far less generous than in any other industrialized country. The apparent logic has been to prod the shiftless unemployed to find work more quickly, while leaving it to Congress to fill any embarrassing gaps in the safety net by periodically enacting program extensions. This green-eyeshade approach may have worked in the more shallow downturns of 1990 and 2001, but in todays economy it spells disaster.
In a time of unprecedented emergency, whats frankly needed at the state level is an acceptance, at least temporarily, of the need to tax and spend, not cut and slash. This will require some courageous leadership in the governments closest to the people, leadership sorely lacking up to now. Otherwise, we may all become Californians, mired in a spreading economic meltdown as our state lawmakers reach desperately for familiar fiscal fixes that will enable them to offend no taxpayers, threaten no vested interests, and carry on in some make-believe semblance of business as usual.
Wayne OLeary is a writer in Orono, Maine.
From The Progressive Populist, November 1, 2009
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