2008Apr States Are Facing Financial Crisis
2008Apr States Are Facing Financial Crisis
As America's economic doldrums persist, some states' budgets are feeling the pinch. California has told 20,000 teachers and support staff that they may be sacked. People whose health insurance is subsidised by their state may face higher fees in Vermont or be cut out entirely in Maine… And while the federal government can weather a slide in revenue by borrowing, most states are required by law to balance their operating budgets every year, leaving the cash-strapped with two unattractive options: raise taxes or cut spending. [Empasis Added] State legislatures usually take the second course, scaling back public services or freezing hiring….
A distinctive feature of the current downturn, moreover, is that it began in the housing market. Property taxes are usually relatively buoyant during downturns. But plummeting home prices affect property-tax revenue as values are reassessed, which will pinch local governments that rely on them. Fewer home sales also mean less money for cities from property transfer taxes. The hangover from America's latest slump could be painful indeed.
The funding problems facing the country will require a combination of higher taxes and lower spending. That sounds good in theory, until you realize it’s your pension and health benefits that are getting reduced while your taxes are simultaneously being raised.
Any municipality trying to raise taxes will be facing an increasing bloc of retiree voters who are unlikely to be in favor of any tax increase. We expect the demonstrators of the 60s to rise up again when faced with decreasing pension and health care benefits. Corporate America has begun the transition to lower benefits. States and local governments remain loathe to face reality.
