Last week I pointed out that Arizona is more dependent on federal funds than any other state. With the federal government’s chronic deficits and a record-size debt, this dependency on Uncle Sam’s allowances is not very healthy for Arizona.
One reader, jdfast, commented:
As the cost of the entitlement programs continue to grow money to pay for them will have to be found someplace and on top of that we will still owe billions of dollars on our bonds that we have sold to China and others
Another reader, Rich K, noting that Republican voters tend to prefer less government than Democrat voters, picked up on the irony in that “the states most dependent on federal funding are ‘more red than blue’ states”.
These are good observations. During my ten years working with state-based fiscal policy issues I have myself made the same experience as Rich K points to. I have met a lot of state legislators who say that “I am the most fiscally conservative guy ever to walk the Earth, but we need federal funds to pay for this-and-that-and-the-other”.
But you do not even have to be a fiscal conservative to realize the problems that come with states’ dependency on Uncle Sam’s allowances. As jdfast notes, there are factual circumstances that neither friends nor foes of big government can disregard. The question remains, therefore: what will Arizona’s legislators do when the federal government starts tightening the cash flow?
Suppose Congress made an across-the-board cut of five percent out of Federal Aid to States. This is an entirely realistic scenario, fully in line with the sequester rules that Congress has been operating under since the 1985 Budget Control Act (also known as “Gramm-Rudman-Hollings”). For Arizona this would mean a loss of $640 million.
This is a lot of money. For comparison, in 2013 the state of Arizona took in…
- $763 million from property taxes;
- $781 million from motor fuel taxes;
- $662 million in corporate income taxes.
It would be unthinkable to try to get another $640 million through any of these taxes; even spreading the burden evenly among these three revenue sources would be a serious challenge for the state legislature. Not to mention the repercussions in terms of declining property values and outbound migration of corporations seeking a more lenient tax burden.
Does the state have other alternatives? Well, if they tried the individual income tax they would have to take almost 19 percent more from Arizona’s families.
What about the spending side? Again, for comparison, in 2013 the state of Arizona spent:
- $684 million on hospitals;
- $788 million on corrections;
- $1.26 billion on highways.
Let us keep in mind that the scenario we are discussing here is one where the federal government suddenly has to make drastic spending cuts because of its irresponsible long-time borrowing. At that point Congress will have no time to argue with states over what to cut and what not to cut; the states will get a reduction in federal funds and be asked to deal with it as best they can. The states, on the other hand, will have even less time to react to those cuts, forcing them to raise taxes and cut spending as fast as they can.
The guiding principle will be “the most cash in the shortest period of time possible”. There will be no time for prudently executed, long-term reforms to reduce spending over time.
It is entirely possible, even likely, that hospitals, corrections and highways would take a beating. Just how big of a beating would depend on how deeply the legislature would be willing to cut into its $8+ billion in public welfare spending.
Regardless of which way you look at this situation, the legislators in Phoenix are not going to find an easy way out. They can, however, start preparing themselves for future reductions in federal funds; the sooner they start planning, the more time they will have to make prudent, thoughtful and sustainable spending reforms.
What kinds of reforms? A good question. Unfortunately, the answer will have to wait until next week!
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Sven Larson, Ph.D., is an economist and Member of the Council of Scholars of Compact for America. He is the author of Industrial Poverty (Gower Publishing) about the debt crisis in Europe. Find his daily blog articles at America’s Fiscal Future.