States' bailout: Largest 15 states spend over 220 percent of tax revenue

The federal government is quietly bailing out states whose tax revenues don't match state expenditures. Funding for this will run out in June 2011. What then?

By , Guest blogger

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    Governor Schwarzenegger gives a thumbs up after rescinding a car tax increase in November 2003. California's nominally-balanced budget requires massive bond sales, backed by the US Treasury. California isn't alone: the largest 15 states all rely on federal funding to make up budget gaps.
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The big news this week in terms of ginormous government transfer payments is, as usual, out of the Fed, as it embarks on an equally ambitious and ill-fated mission to buy $600 billion of US Treasury debt. Unsurprisingly, it’s not the only immense transfer of wealth taking place between governmental bodies. As spotlighted by Meredith Whitney, CEO of the Meredith Whitney Advisory Group, the feds are continuing to subtly bailout state governments at record levels and in an ongoing and unsustainable fashion which she describes in a recent WSJ opinion piece.

From The Wall Street Journal:

“What [...] investors fail to appreciate is that state bailouts have already begun. Over 20% of California’s debt issuance during 2009 and over 30% of its debt issuance in 2010 to date has been subsidized by the federal government in a program known as Build America Bonds. Under the program, the U.S. Treasury covers 35% of the interest paid by the bonds. Arguably, without this program the interest cost of bonds for some states would have reached prohibitive levels. California is not alone: Over 30% of Illinois’s debt and over 40% of Nevada’s debt issued since 2009 has also been subsidized with these bonds. These states might have already reached some type of tipping point had the federal program not been in place.

“Beyond debt subsidies, general federal government transfers to states now stand at the highest levels on record. Traditionally, state revenues were primarily comprised of sales, personal and corporate income taxes. Over the years, however, federal government transfers have subsidized business-as-usual state spending not covered by state tax collections. Today, more than 28% of state funding comes from federal government transfers, the highest contribution on record.

“These transfers have made states dependent on federal assistance. New York, for example, spent in excess of 250% of its tax receipts over the last decade. The largest 15 states by GDP spent on average over 220% of their tax receipts. Clearly, states have been spending at unsustainable levels without facing immediate consequences due to federal transfer payments and other temporary factors.”

Because the federal government will backstop the states regardless of their profligacy — a situation which tends to play out differently in the European Union, for example — the bickering, relatively speaking, flies under the radar and the fiscal irresponsibility just isn’t as high profile (as compared to the highly-visible EU member state (GIIPS) meltdown). As it goes, the state budget situation is continuing to deteriorate just as the Fed is firing up the presses for another moonshot-caliber of stimulus for the economy. Basically, when the debt-laden US can already least-afford the expenditure. According to Whitney, “almost all of the major federal government subsidy programs [for states] will run out in June 2011.” So, we can probably go ahead and mark that “unforeseeable crisis” announcement date on next year’s calendar.

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You can read more details in Whitney’s WSJ opinion piece on how state bailouts have already begun.

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