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The Case for More Federal Aid

Why Washington should send dollars to the states—and fast.

State governments are facing catastrophic budget deficits for fiscal year2012, and they are suggesting drastic cuts to attempt to fill the gaps. But this proposed austerity may not be necessary, and, moreover, it is almost certainly unwise. While the draconian changes under consideration in many states are a sad legacy of the economic downturn, their sheer magnitude represents a failure of the federal government: From Hill Republicans to President Obama, officials in Washington are proposing new budgets that wouldn’t do nearly enough to assist the states.

There is no denying that states’ budget problems are severe. Arizona is short about $1.2 billion, around 13 percent of its 2011 budget. Illinois faces a $15 billion gap, an astonishing 44.9 percent of its 2011 budget. Minnesota is forecasting a $6.2 billion hole, about a sixth of the state’s two-year budget. And California is grappling with the nation’s largest deficit—$25.4 billion, about 30 percent of what the state spent the year before. All in all, “44 states and the District of Columbia are projecting budget shortfalls totaling $125 billion for fiscal year 2012,” according to the Center on Budget and Policy Priorities. That’s only slightly less than the entire budget of New York.

States are facing these gaps largely because tax revenues are well below historical norms—Texas, for example, is projected to collect $72 billion in fiscal 2012 and 2013, down from $87 billion in the two years that preceded it—and the bad economy requires governments to support more people with unemployment and Medicaid benefits. What’s more, balanced-budget provisions—unlike the federal government, almost all states are forbidden from running deficits—also mean states can’t just borrow money while they wait for the economy to recover. So, as they have in recent years, states have proposed again slashing their spending, sharply raising tax rates, or a combination thereof.

The effects, unsurprisingly, could be devastating. In Arizona, if Governor Jan Brewer’s budget is enacted, 280,000 poor people will lose their Medicaid benefits. In Texas, one budget under discussion would lay off 9,600 state workers, eliminate financial aid for 60,000 college students, end vocational rehabilitation for about 7,000 disabled Texans, and slash already-skimpy Medicaid reimbursement rates by 10 percent. Illinois is filling part of its budget hole by raising its income-tax rates by about two-thirds, meaning that a family of four earning $60,000 would pay an extra $1,040 in state taxes.And the state also hiked its business-tax rate, meaning that Illinois’s total rate is now one of the highest in the country. But all the Illinois tax increases will fill less than half of the projected deficit, so steep spending cuts might still loom on the horizon.

These cuts not only impose a human cost; they also threaten to undermine our fragile economic recovery. While it’s tempting to cheer government belt-tightening—if families have to make sacrifices, why shouldn’t state governments?—they’re ultimately harmful in the same way as private-sector reductions. Unemployed government employees, just like unemployed factory workers and CEOs, will spend less money in malls, on groceries, and at the movies. When repeated across the country, budget cuts and higher taxes translate to fewer jobs, a higher unemployment rate, and a longer stay in the economic doldrums. Over the past few months, job losses in the public sector have been a drag on net job creation. Higher tax rates—like the ones enacted in Illinois—also slow economic growth by inhibiting entrepreneurial and consumer spending.

Even worse, some of this human and economic suffering is preventable. We have an institution that can borrow money to create stimulus and fill budget holes in times of crisis: the federal government. And, in 2009, when the stimulus act was passed, this was exactly the approach it took. Out of the stimulus bill’s $814 billion in tax cuts and spending, about $140 billion went to help states fund Medicaid and keep teachers working. Another $26 billion state aid package was passedin the summer of 2010. The money didn’t mean that states could wholly avert layoffs and spending cuts, but it did help ease the pain.

As states write their 2012 budgets, however, the money is almost all gone. And it is unlikely that getting more money for the states will be an easy, or even achievable task. Republican leadership has already positioned itself strongly against it. In late January, House Majority Leader Eric Cantor flatly announced, “There will be no bailout of the states,” a position that Senate Minority Leader Mitch McConnell quickly echoed.

But the GOP isn’t solely to blame. It is perhaps more dispiriting to see Democrats seemingly give up on the idea of state aid.In his State of the Union address, President Obama ignored the issue altogether. And the budget he released on Monday makes only small efforts at helping the states—a proposal that would allow states a two-year grace period to repay money they owe the federal government and some assorted long-term investment programs. All in all, Obama’s budget may actually make the situation in the states even worse because it would slash billions in funding for programs like Community Development Block Grants and the Low Income Home Energy As­sistance Program.

The federal government cannot afford to provide state aid in perpetuity, nor should it. But, with unemployment still high and economic growth relatively slow, now is not the time to discontinue it. Some particularly dysfunctional states, such as California and Illinois, would be hurting even without the downturn sapping their revenues and forcing larger expenditures on social services. But, with more than 40 states suffering—red states, blue states, high-tax states, and low-tax states—it is difficult to argue that large budget deficits are a problem springing only from fiscal irresponsibility.

There are relatively low-cost options to deal with the problem, such as Christopher Edley’s proposal to let states take an advance on federal funds they’re due in future years. The federal government could even use some money for a Race to the Top-like program (recently used to spur education reform) to encourage states to make changes to ensure their long-run fiscal stability. No matter how it goes about it, Washington must continue giving aid to state governments. Put simply, the federal government should not ignore problems it could easily ameliorate.

Alexander C. Hart is a reporter-researcher at The New Republic.

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