It Gets Worse Before it Gets Better: Taxes are Going Up

 

We already know this: a lot of states are in deep fiscal trouble.  From Politico:

Many states, including those with the country’s largest population centers, are now on a path to insolvency. This is primarily due to fiscally promiscuous lawmakers, skyrocketing Medicaid costs and unsustainable gold-plated government employee pension plans that most Americans could never dream of.

These states’ ballooning obligations simply cannot be met without either soaking state taxpayers or federal assistance — read: taking taxpayer dollars from properly managed states.

Heading into 2011, states are facing an overspending-generated budget shortfall of $72 billion, according to the National Conference of State Legislatures. Coupled with unfunded state and local pension obligations estimated in excess of $3 trillion — a half-trillion in California alone — one understands the concern that states are the next “too big to fail.”

And so are a lot of cities, too. Brandon Greife writes in Redtstate:

A recent study of the 77 largest municipal pension systems found that the total unfunded liabilities of America’s municipal pension systems is more than $500 billion. That’s just in pensions! Of course, they also owe billions upon billions of dollars for other types of debt – the result of ridiculous spending coupled with a massive decline in tax revenue. Veronique de Rugy, a researcher and economist for the Mercatus Center, estimates that total outstanding municipal bond debt is now $2.8 trillion – doubling in just the past decade.

And today’s WSJ offers an historical parallel to ponder.  This is just like 1841:

Land values soared. States splurged on new programs. Then it all went bust, bringing down banks and state governments with them. This wasn’t America in 2011, it was America in 1841, when a now-forgotten depression pushed eight states and a desolate territory called Florida into the unthinkable: They defaulted on debts.

This was an incredible step, even then. Fledgling U.S. states like Indiana and Illinois were still building credibility on global debt markets. They rightly feared “a prejudice so deep and wide” that they could never sell bonds in Europe again, said one banker.

Their paranoia would be familiar to the shell-shocked California and Illinois of 2011. Each is beset by budget problems so great that some have begun debating default or bankruptcy. These worriers may draw comfort from the state crises that raged and retreated long ago. Most of the states eventually paid off their debts, and changed their laws to safeguard their finances, helping make U.S. states some of the world’s best credits.

But first, they raised taxes:

“People didn’t want to raise taxes but they did,” says John J. Wallis, a University of Maryland economic historian. He traces our current states crises back to those defaults in 1841, after which legislators amended constitutions to clamp down on new borrowing. Over time, these rules have been perverted by politicians, meaning that “constitutional rules have made it harder to raise taxes than to raise expenditures,” he says.

Does anybody doubt that in, say, six to nine months we’ll be talking — at least in the defaulting states — about major tax hikes? And probably at the federal level, too?  Is it worth it if, as in 1841, we get a renewed “clamp down” on public borrowing?

It isn’t to me, of course.  But maybe someone sees some silver lining here?

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More From Rob Long:

Before We Shrink the Federal Government, We Should Scatter It

Meme for 2011: Don’t Touch My [INSERT AREA OF GOVERNMENT INTERVENTION HERE] Junk

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  1. Profile Photo Inactive
    @MelFoil

    If I was living in California today, I’d pack up all my belongings, strap ’em on top of the car, and head for Oklahoma.

    • #1
  2. Profile Photo Member
    @

    Without a doubt we will have a state-wide referendum in California on increasing taxes in 2011 — specifically rolling back Prop 13 limits on property taxes. And it will be full-on class warfare — landlords vs. renters. Jerry Brown has already called on us all to sacrifice for the good of California, attempting to stir some kind of state patriotism.

    • #2
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    @SteveManacek

    Rob — here in Illinois it’s already the main agenda item for the (Democrat-controlled, obviously) legislature. The only question on the table seems to be whether the state income tax should be raised 33% or 66% or something in between. Whatever they come up with, it will be happily signed into law by Governor Pat Quinn, former understudy to Rod Blagojevich, who somehow got himself elected despite Repbulicans putting up a relatively good showing state-wide in November. This, of course, will do wonders for the hard-pressed Illinois economy.

    • #3
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    @LadyKurobara

    The Depression of 1841 is irrelevant. America is a very different country, now — much bigger, with a lot more money at stake. Our current situation has no real precedent. We are in uncharted seas, with storm clouds on the horizon. It is impossible to predict what will happen, except to say that it will be very, very bad.

    • #4
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    @MichaelPate

    A related bit of news from the Census Bureau:

    Total state government revenue dropped to $1.1 trillion in 2009, a decline of 30.8 percent from $1.6 trillion in 2008, according to the latest findings from the U.S. Census Bureau. The large decrease in total revenue was mainly caused by the substantial decrease in social insurance trust revenue. … State governments received nearly $1.5 trillion in general revenues in 2009, a decrease of 1.4 percent from 2008. … Total taxes collected in 2009 ($715.1 billion), which accounted for 47.9 percent of general revenue, fell by 8.5 percent from $781.6 billion in 2008. … Federal grants ($477.7 billion) increased 12.9 percent from 2008 to 2009 and accounted for nearly one-third of general revenue.

    • #5
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    @KenSweeney
    Rob Long: But maybe someone sees some silver lining here? ·

    There are glimmers of hope.

    Andrew Cuomo, taking over the governorship of the navy blue state of New York, will attempt to cut spending in order to close the budget shortfall. The rhetoric of elected Democratic leaders has shifted in our direction.

    Cuomo, during his remarks to the Albany crowd, repeatedly said that state taxes were too high and that raising them was not an option.”

    Of course, watch what the DO, rather than what they SAY. I’m optimistic that reality has sunk in that you can’t tax yourself to prosperity in New York. California and Illinois are hopeless until default will force them to accept math.

    • #6
  7. Profile Photo Inactive
    @rayconandlindacon
    Lady Kurobara: The Depression of 1841 is irrelevant. America is a very different country, now — much bigger, with a lot more money at stake. Our current situation has no real precedent. We are in uncharted seas, with storm clouds on the horizon. It is impossible to predict what will happen, except to say that it will be very, very bad. · Jan 6 at 9:30am

    Don’t forget that all economies are far bigger now. Then it was tens and hundreds of millions, now its hundreds of Billions and trillions. Bottom line… economies, like morality, self regulate. Either we restore sanity or we perish. Frankly, the worst part of all this is that it’s a slam dunk that for the next two years Obama will simply “Stimulate” the failed Democrat state economies through each election cycle. Then comes 2012. Hopefully the pain will be reaching the Vicoden level by then.

    • #7
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    @user_83937

    As states may not go into bankruptcy in a federal republic, I would suggest that those that require federal bailouts lose their voting rights in the Senate, the House, and the Electoral College, until they have repaid the remaining states. They can be accorded the observer status in D.C. that is accorded to other places that are a net drain on the remaining states, such as Puerto Rico and the D.C.

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    @

    Much of the debt is obligations to state employees. These troubled, deep-blue states can’t necessarily increase revenues by raising taxes because citizens are mobile. Obviously, they’ll want to be bailed out by the Feds, but I can’t imagine that playing well politically. Let’s face it, at some point we’re going to have some European-style unrest when the public trough is shut down, and it’s inevitable that it will be shut down. It’s only a question of timing.

    • #9
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    @BrianWatt
    etoiledunord: If I was living in California today, I’d pack up all my belongings, strap ’em on top of the car, and head for Oklahoma. · Jan 6 at 8:51am

    Just having trouble tying down the cat. Should be on my way soon. Arms are a bit scratched up but I’m sure I can still drive.

    • #10
  11. Profile Photo Member
    @BrianWatt
    Your Grace: I don’t see the point of having a federal republic if states can’t go bankrupt now and then. What’s it got to do with the rest of us? California had guards to turn back Okies back in the ‘Thirties. Granted it was ruled unconstitutional and stuff, but why couldn’t California’s bordering states give it another try under the current reasoning that the constitution is flexible as hell? · Jan 6 at 11:05am

    I think this is a good proposal but only on one condition – that the neighboring states take all of California’s illegal aliens. You’ll have to trust me when I say that they are NOT a drain on any state’s economy and more than willing to do those jobs that natural born citizens are not willing to do. Honestly, they will really help all the other states’ economies. What’s not to like?

    • #11
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    @BrianWatt
    Lawrence Sullivan: Here in Wisconsin we at least had the sense to throw out the Democrat Governor and gave back BOTH houses of the legislature to the Republicans. We’ve got a 3 billion dollar deficit (proportionally not much different than CA and IL). Scott Walker, the new Governor has already floated the idea of decertifying the public employees union. I won’t mind paying higher taxes for a while in WI if they make permanent changes to avoid the same problem in the future. But I’ll be damned if I want to pay more federally mandated Medicaid costs or bail out CA or IL! · Jan 6 at 11:31am

    Make your check payable to: “State of California c/o Jerry Brown”. That’s all we ask. Jerry will know what to do with the money. I heard a rumor that he might be thinking that it’s time to come up with a plan…soon.

    • #12
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    @RobLong
    CJRun: As states may not go into bankruptcy in a federal republic, I would suggest that those that require federal bailouts lose their voting rights in the Senate, the House, and the Electoral College, until they have repaid the remaining states. They can be accorded the observer status in D.C. that is accorded to other places that are a net drain on the remaining states, such as Puerto Rico and the D.C. · Jan 6 at 2:03pm

    In the old days, in men’s clubs, when a guy was behind on his dues or bar tab, his name was “posted” — put up on a list by the front door, and his membership was suspended. He could come into the club, of course, and sit. But he couldn’t eat. Or drink. Until the bill was paid. Maybe that’s kind of the thing you’re suggesting, CJRun? I like it!

    • #13
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    @CharlesGordon
    Brian Watt

    California’s illegal aliens… they are NOT a drain on any state’s economy

    Think about the “not willing to do” part—the most destructive aspect of complacent acquiescence to expanding settlements of unskilled, unassimilated aliens and their families in our country.

    Our kids no longer mow lawns, clean swimming pools, or, more insidiously, help with (much less “do”) the dishes.

    Moms no longer cook, garden, do their own nails…

    All reserved for the helots.

    Don’t count the dollars sent overseas/across the border that the helot does not circulate here; but do count each dollar helots earn as a lesson lost about work and the value of money our children will no longer learn.

    Don’t count the cost of teaching an alien culture steeped in a tradition of illiteracy; but do count all those opportunities lost to a new generation now ignorant of what we did in our childhood in furtherance of our traditions.

    All this outsourcing to aliens—consuming more of our nation’s soul than our money—is about our willingness to do some of the little things ourselves the way we always did and not pretend that their servility makes us aristocrats.

    • #14
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    @Karen

    This is yet another example of how The Boomers have totally hosed the rest of us. They will be known as the most selfish generation in American history. And it doesn’t help that they raised a generation of kids who don’t save for anything. But I still have confidence in the American people. We’ve been through worse, and we’ll get through this. I know the standard of living for my kids will be lower when they’re my age. That greatly disappoints me, but if the Boomers weren’t so addicted to their entitlement benefits and big pensions, things might be different. I think this is a golden opportunity for Boomers to actually make something of themselves and make personal sacrifices, but I don’t have much confidence they will. Their greatest accomplishment is elevating whining to an art form. We will get through it somehow, with or without them. Our best days are ahead of us.

    • #15
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    @LadyKurobara
    Charles Gordon

    Think about the “not willing to do” part—the most destructive aspect of complacent acquiescence to expanding settlements of unskilled, unassimilated aliens and their families in our country.

    Our kids no longer mow lawns, clean swimming pools, or, more insidiously, help with (much less “do”) the dishes.

    Moms no longer cook, garden, do their own nails…

    All reserved for the helots.

    Don’t count the dollars sent overseas/across the border that the helot does not circulate here; but do count each dollar helots earn as a lesson lost about work and the value of money our children will no longer learn.

    Don’t count the cost of teaching an alien culture steeped in a tradition of illiteracy; but do count all those opportunities lost to a new generation now ignorant of what we did in our childhood in furtherance of our traditions.

    All this outsourcing to aliens—consuming more of our nation’s soul than our money—is about our willingness to do some of the little things ourselves the way we always did and not pretend that their servility makes us aristocrats.

    Your point is excellent, Charles, and you articulated it beautifully. Very well done.

    • #16
  17. Profile Photo Inactive
    @LadyKurobara
    Charles Gordon

    All this outsourcing to aliens—consuming more of our nation’s soul than our money—is about our willingness to do some of the little things ourselves the way we always did and not pretend that their servility makes us aristocrats.

    That is an especially sharp point. I know a family (“FDR liberals,” all) whose members simply love taking vacations on cruise ships — because it is “so much fun to boss around the little brown boys” and treat them like slaves. And that attitude is especially prominent in the women of the family.

    This is the face of the tyrant that lurks behind the “compassionate” mask that every liberal wears.

    • #17
  18. Profile Photo Member
    @
    Karen: This is yet another example of how The Boomers have totally hosed the rest of us. They will be known as the most selfish generation in American history.

    You tar with an awfully wide brush. I’ve heard this rant from you before.

    There are a lot of boomers who pay more taxes in a year than you’re likely to in a decade.

    You’re worried about your children’s standard of living? Hey, some of us never had children. But we get to pay higher taxes to make up for your kids’ personal exemptions and child tax credits. And for their schools and school lunches.

    I’ve never voted for the kind of politician who spends wildly. I’ve never asked government for anything.

    And in hard times, I never blamed other people for my circumstances. Make the best of your situation and stop pointing fingers at people you don’t even know.

    • #18
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    @BrianWatt
    Charles Gordon

    Brian Watt

    California’s illegal aliens… they are NOT a drain on any state’s economy
    Think about the “not willing to do” part—the most destructive aspect of complacent acquiescence to expanding settlements of unskilled, unassimilated aliens and their families in our country.

    Our kids no longer mow lawns, clean swimming pools, or, more insidiously, help with (much less “do”) the dishes…. · Jan 6 at 5:31pm

    Don’t disagree suffice to say that when illegal aliens are hired to do the work there are fewer jobs for American teenagers. In the 70’s all my cousins earned their summer money picking berries in Washington State. Now the work is done by undocumented aliens. That said, there’s nothing stopping American teenagers from competing with illegals by offering better lawn or pool care. There’s no law that says they can’t compete for the same job at a better price. But agree with you and others on this posting that too many of “those kids today” are missing the work ethic we had when growing up…why I remember trudging fifty miles in the snow just to get to work…

    • #19
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    @BrianWatt

    Have to agree with Cool Hand. One would think that the tax rate compromise with Obama was some sort of victory. The real victory will be when we can actually cut the current rates significantly to stimulate growth in the economy, hiring, and a growth in tax revenue that will at least help to alleviate federal, state and local debt. You can’t tax your way to prosperity. The Laffer Curve as a practical model still works. Substantial tax cuts worked for Kennedy, Reagan and Clinton. There’s absolutely no reason they won’t work again. It’s just a matter of quashing the Leftist ideologues and dismissing these discussions about “fairness”. We’re destined to be “fair” all the way to the poorhouse.

    • #20
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    @BrianWatt

    And the heat to eliminate government agencies that have been a drain must be intensified. Even those on the Left are admitting that the Department of Education is an embarrassment. So, why back off now? The timing and the public sentiment about it couldn’t be better to eliminate this agency…even if the House has to defund it in stages with a timetable to complete elimination. Analogies to Afghanistan and Vietnam more than welcome. Rather than helping American’s children how many lives has the Dept. of Education ruined or destroyed through mismanagement, misappropriation of funds and sheer incompetence?

    • #21
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    @Karen
    Kenneth

    Karen:

    I’ve said it before, because it’s true. The problem is that Boomers didn’t have enough children. They didn’t replace themselves. So now there are fewer workers per beneficiary. And I think we should be honest about who and what we are spending our tax dollars on. The truth is a bitter pill, I know. And you’ve asked nothing from your country?! Of course you have! You’ve benefited a great deal from the sacrifices, wealth and protection others have provided for you. And yes, I hold responsible people who had the opportunity to reform a wasteful, abusive and fraud-ridden system and didn’t. And now they march around with “hands off my Healthcare” signs when 50 cents of every dollar spent on healthcare is paid by the government. When you point a finger, there are three pointing back at you. My family is feeling the impact of Obama’s raise freeze. My state and local taxes are ridiculously high. I’m prepared to do my part to reform the problems. I don’t want my kids burdened by my debt. But I want to know, what sacrifices are Boomers willing to make?

    • #22
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    @RossC

    I suggest that CA and IL sing their bailout request per the Canadian band Moving Pictures song “What About Me”.

    What about meIt isn’t fairI’ve had enough now I want my shareCan’t you seeI wanna liveBut you just take more then you give
    • #23
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    @

    I don’t see the point of having a federal republic if states can’t go bankrupt now and then. What’s it got to do with the rest of us? California had guards to turn back Okies back in the ‘Thirties. Granted it was ruled unconstitutional and stuff, but why couldn’t California’s bordering states give it another try under the current reasoning that the constitution is flexible as hell?

    • #24
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    @prairiedoc

    Here in Wisconsin we at least had the sense to throw out the Democrat Governor and gave back BOTH houses of the legislature to the Republicans. We’ve got a 3 billion dollar deficit (proportionally not much different than CA and IL). Scott Walker, the new Governor has already floated the idea of decertifying the public employees union. I won’t mind paying higher taxes for a while in WI if they make permanent changes to avoid the same problem in the future. But I’ll be damned if I want to pay more federally mandated Medicaid costs or bail out CA or IL!

    • #25
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    @StevenPotter

    If they raise taxes again in California I’m going to be….ticked off, to keep the language acceptable to the Ricochet Code of Conduct. It’s maddening that the state legislatures and Governor escaped retribution in the last election cycle for creating this mess.

    • #26
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    @CoolHand

    I dunno Rob, I know you’re a self titled squish, but it seems counterproductive to stipulate at the outset that the only way to stem a budget shortfall is to raise taxes.

    Given what we’ve seen time and again with capital flight and other methods of taxation avoidance, higher tax rates very nearly guarantee lower tax receipts. That’s the exact opposite of the intended outcome. So, the question becomes, why assume that we must do it?

    If it’s detrimental, why undertake it? Are all politicians that stupid? Surely not (most yes, but certainly not all).

    We need to make the straightforward argument for the reduction, not in services, or first responders, but in bureaucratic overhead.

    For every fireman manning a hose, there are three or five (or however many) desk jockeys pushing almost useless paper. Make the argument, in clear and plain language, that not one firefighter gets the ax until two of those three desk pilots have gotten theirs.

    Make the argument that not one bridge is left to crumble until the fifth superintendent in charge of pavement evaluation programming oversight has taken a pay cut from $500k/yr down to $100k/yr.

    Continued . . .

    • #27
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    @CoolHand

    Why is no one making this case? Why does the discussion always begin with “We’re going to have to raise taxes, who’s it going to be on?”

    Am I the only person here who feels like he’s in an episode of the Twilight Zone when he listens to Art Laffer and reads his work and sees everyone here and on TV agree with it, only to then have them all turn around and suggest that increased taxes are the only way to solve the debt problem?

    Am I going mad? Maybe I’m too simple minded to grasp these sophisticated arguments. Although, it has been my experience that sophistry is really just an effective way to lie to oneself and others without having to admit as much when called on it. Your mileage may vary.

    • #28
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    @
    Karen

    Kenneth

    Karen:

    I’ve said it before, because it’s true. The problem is that Boomers didn’t have enough children. They didn’t replace themselves. So now there are fewer workers per beneficiary.

    Oh, I see. Those evil Boomers were obligated to have more children in order to provide more taxes to support your children and your benefits.

    I don’t know how many children you have, but I understand the little critters are awfully expensive. That’s the choice you made.

    And by the way, don’t I recall that someone in your family works for the Federal government? Perhaps that’s where your tone of entitlement comes from.

    • #29
  30. Profile Photo Inactive
    @CoolHand

    You added a bunch to your post while I was replying, but I don’t really think it changes anything about my reply.

    I have very little use for “public servants” of pretty much any stripe, because personal experience has almost universally shown me bad things about them.

    This is precisely why I advocate that the reduction in bureaucratic overhead be the first and most oft used tool to reduce government spending.

    Administrative jobs that create almost no additional value but cost hundreds of thousands of dollars in salary and benefits every year can be expunged entirely without anyone even noticing that it happened (except the sap who gets fired).

    Do this often enough and you end up with some real money. At $250k a piece, it only takes 4,000 pink slips to net a billion dollars worth of reductions.

    I am confident that there are far more than 4k highly paid yet entirely useless administrators on the federal payroll.

    • #30
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