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If Only They Had Listened

Way back on February 8, 2009, just as the Nevada Legislature was getting underway, Assemblyman Ed Goedhart (R-Amargosa Valley) sent his colleagues a brief letter urging consideration of four fiscally conservative principles:

(1) Sunset any tax hikes
(2) Make any efforts at tax reform “revenue neutral”
(3) Adopt a stringent spending cap for future sessions
(4) Don’t use one-time “stimulus” money for new or ongoing programs

Thanks to Sen. Bill Raggio (R-Reno), most of the tax hikes passed by the ’09 Legislature will sunset next year. However, there was no effort to adopt revenue-neutral tax reform to broaden the tax base, nor did the Legislature agree to adopt a spending cap which would prevent it from recklessly spending again in the future once the economy turns around.

But it’s point #4 I want to address today. Here is specifically what Assemblyman Goedhart wrote almost a year ago:

“It appears likely the federal government will approve some level of ‘stimulus’ money for various states which are overspending their budgets – and that Nevada will be one of them. If so, members of the Nevada Legislature ought to insist that one-shot federal ‘stimulus’ money not be used to create new programs which we’ll only have to find additional revenue for down the road once the federal money is gone.”

Of course, the Legislature ignored Goedhart’s fiscally sound advice and used the federal stimulus money to plug the budget gap, which has now helped create what is estimated to be a $2.4 BILLION budget deficit for the next biennium.

Any bets on whether or not those “sunsetted” tax hikes will be extended or made permanent in 2011?

If it’s any comfort (and it’s not), other states used the federal stimulus money as irresponsibly as Nevada and are now in deep doo-doo, too. Take a minute to read the following op/ed, which appears in today’s Wall Street Journal – and keep it in mind as candidates for governor and the Legislature ask for your support this coming campaign season.

Oh, and the next time you see Assemblyman Goedhart, take a minute to thank him for at least trying to warn his colleagues about this.

The States and the Stimulus
How a supposed boon has become a fiscal burden

Remember how $200 billion in federal stimulus cash was supposed to save the states from fiscal calamity? Well, hold on to your paychecks, because a big story of 2010 will be how all that free money has set the states up for an even bigger mess this year and into the future.

The combined deficits of the states for 2010 and 2011 could hit $260 billion, according to a survey by the liberal Center on Budget and Policy Priorities. Ten states have a deficit, relative to the size of their expenditures, as bleak as that of near-bankrupt California. The Golden State starts the year another $6 billion in arrears despite a large income and sales tax hike last year. New York is literally down to its last dollar. Revenues are down, to be sure, but in several ways the stimulus has also made things worse.

First, in most state capitals the stimulus enticed state lawmakers to spend on new programs rather than adjusting to lean times. They added health and welfare benefits and child care programs. Now they have to pay for those additions with their own state’s money.

For example, the stimulus offered $80 billion for Medicaid to cover health-care costs for unemployed workers and single workers without kids. But in 2011 most of that extra federal Medicaid money vanishes. Then states will have one million more people on Medicaid with no money to pay for it.

A few governors, such as Mitch Daniels of Indiana and Rick Perry of Texas, had the foresight to turn down their share of the $7 billion for unemployment insurance, realizing that once the federal funds run out, benefits would be unpayable. “One of the smartest decisions we made,” says Mr. Daniels. Many governors now probably wish they had done the same.

Second, stimulus dollars came with strings attached that are now causing enormous budget headaches. Many environmental grants have matching requirements, so to get a federal dollar, states and cities had to spend a dollar even when they were facing huge deficits. The new construction projects built with federal funds also have federal Davis-Bacon wage requirements that raise state building costs to pay inflated union salaries.

Worst of all, at the behest of the public employee unions, Congress imposed “maintenance of effort” spending requirements on states. These federal laws prohibit state legislatures from cutting spending on 15 programs, from road building to welfare, if the state took even a dollar of stimulus cash for these purposes.

One provision prohibits states from cutting Medicaid benefits or eligibility below levels in effect on July 1, 2008. That date, not coincidentally, was the peak of the last economic cycle when states were awash in revenue. State spending soared at a nearly 8% annual rate from 2004-2008, far faster than inflation and population growth, and liberals want to keep funding at that level.

A study by the Evergreen Freedom Foundation in Seattle found that “because Washington state lawmakers accepted $820 million in education stimulus dollars, only 9 percent of the state’s $6.8 billion K-12 budget is eligible for reductions in fiscal year 2010 or 2011.” More than 85% of Washington state’s Medicaid budget is exempt from cuts and nearly 75% of college funding is off the table. It’s bad enough that Congress can’t balance its own budget, but now it is making it nearly impossible for states to balance theirs.

These spending requirements come when state revenues are on a downward spiral. State revenues declined by more than 10% in 2009, and tax collections are expected to be flat at best in 2010. In Indiana, nominal revenues in 2011 may be lower than in 2006. Arizona’s revenues are expected to be lower this year than they were in 2004. Some states don’t expect to regain their 2007 revenue peak until 2012.

So when states should be reducing outlays to match a new normal of lower revenue collections, federal stimulus rules mean many states will have little choice but to raise taxes to meet their constitutional balanced budget requirements. Thank you, Nancy Pelosi.

This is the opposite of what the White House and Congress claimed when they said the stimulus funds would prevent economically harmful state tax increases. In 2009, 10 states raised income or sales taxes, and another 15 introduced new fees on everything from beer to cellphone ringers to hunting and fishing. The states pocketed the federal money and raised taxes anyway.

Now, in an election year, Congress wants to pass another $100 billion aid package for ailing states to sustain the mess the first stimulus helped to create. Governors would be smarter to unite and tell Congress to keep the money and mandates, and let the states adjust to the new reality of lower revenues. Meanwhile, Mr. Perry and other governors who warned that the stimulus would have precisely this effect can consider themselves vindicated.