State Lawmakers Against State Bailouts | Opinion

As the debate over the roughly $1 trillion proposed federal bailout of state and local governments continues in Washington, many state leaders have joined together to say, "no thanks."

A recent letter from our organization, American Legislative Exchange Council (ALEC), was signed by over 200 state legislators and 1,300 other state leaders and concerned taxpayers. It explains how federal bailouts decrease state sovereignty, incentivize future fiscal irresponsibility and reward fiscally reckless states at the expense of fiscally responsible states. As some organizations and policymakers lobby for the bailout package, the ALEC letter highlights that many state and local officials are increasingly concerned with another round of federal spending.

President Trump and conservatives in Congress have voiced opposition to a "blue state bailout." But all states—red and blue alike—seeking the elusive "free lunch" from Washington should reconsider.

States have already received billions in aid from the federal government to address pandemic-related expenses. The CARES Act included a general $150 billion COVID-19 relief fund, a $30 billion education costs fund, a $45 billion disaster relief fund and more for state and local governments.

Federal bailouts will lead to higher taxes at the state level. According to research from the Mercatus Center at George Mason University, every dollar of federal aid drives state and local taxes higher by 33 to 42 cents. The "strings" attached to federal funds also push state spending higher. In 2009, President Barack Obama signed the American Recovery and Reinvestment Act, which included "maintenance of effort" requirements. These proved far costlier than expected for lawmakers, who traded away budget flexibility for those "shovel ready projects."

While state and local governments may face pandemic-related shortfalls in the near term, it is important to remember their revenue collections and total spending have steadily increased in recent years. Even after fully adjusting for increases in population and inflation, state and local direct general spending has grown by nearly 90 percent over the past 40 years.

And despite one of the longest economic booms in American history—thanks in part to federal pro-growth tax relief and regulatory efforts—many states have continued to accumulate debt and unfunded public pension obligations. In fact, ALEC's Center for State Fiscal Reform research reveals three sets of hidden state debt totaling more than $7 trillion dollars: $5 trillion in unfunded public pensions, over $1 trillion in state bonded debt and another unfunded $1 trillion in other post-employment benefits (OPEB).

The proposed federal bailout of the states would empower states to continue this destructive cycle. It would also send the wrong message to states that have made difficult spending choices and practiced fiscal discipline.

North Carolina, for example, dramatically lowered its personal and corporate income tax rates over the past decade. It did this while also building a rainy-day fund from a balance of zero to $1.17 billion as the economy thrived. The growth produced, while substantially reducing tax rates, allowed North Carolina lawmakers to accumulate a balance of $3.9 billion in the unemployment trust fund, after repaying more than $3 billion in debt.

On the other end of the spectrum, Illinois' rainy-day fund of $1.19 million would only keep the state running for roughly 15 minutes. Yet Illinois has committed to over $486 billion ($38,000 per resident) in bonded debt and unfunded public pension and OPEB liabilities—equal to 56 percent of the state's GDP. It should come as no surprise that leaders in Springfield are now at the front of the line to support a federal bailout of states.

Illinois state capitol in Springfield
Illinois state capitol in Springfield Raymond Boyd/Michael Ochs Archives/Getty Images

Rather than another bailout from the federal government, states need to take the difficult but necessary actions to govern. President Ronald Reagan reminded us that the federal government did not create the states; the states created the federal government. To preserve state autonomy and our system of competitive federalism across the "50 laboratories of democracy," states need to retain the ultimate responsibility for their taxing and spending decisions—even when it is difficult to do so.

In the absence of a federal bailout, state and local governments will need to take a hard look at spending reforms, which eliminate redundancy in state budgets and increase accountability to taxpayers.

In 2002, the state of Washington took this priority-based budgeting approach and closed a $2.5 billion budget gap without raising taxes under the leadership of Democratic Governor Gary Locke and a bipartisan group of legislators. They achieved this remarkable success by identifying the core functions of government and ranking agency and program spending needs from top to bottom until they spent available revenue.

This level of fiscal discipline is not easy, but it is necessary. With some estimates of the national debt reaching a previously unthinkable $30 trillion by the end of 2020, a federal bailout of the 50 states would have disastrous results for the American taxpayer.

Jonathan Williams is the executive vice president of policy and chief economist at the American Legislative Exchange Council. Lee Schalk is the senior director of the Center for State Fiscal Reform at the American Legislative Exchange Council.

The views expressed in this article are the writers' own.