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The Coming Fiscal Crisis Of State And Local Governments

Breaking News

The Coming Fiscal Crisis Of State And Local Governments


Yves here. The collapse of highly taxed hotel stays, restaurant and bar business, and retail sales is on track to be an even harder blow for state and local governments than the financial crisis. The Obama Administration revived on a temporary basis, revenue sharing, a program created by that great American socialist, Richard Nixon.

Readers have already taken note of this looming problem.

By Barkley Rosser, Professor of Economics at James Madison University in Harrisonburg, Virginia. Originally published at EconoSpeak

Yesterday my wife Marina and I mt with our personal attorney, a close friend also, to fix some loose ends in our wills due to some recent family deaths, as well the current situation. He also happens to sit on the Harrisonburg City Council, as well as having been Mayor for awhile and a longtime member of the city Planning Commission, someone whose competence we have great respect for. Anyway, he noted that on April 14 the City Manager is to present a proposed budget to the City Council, and that it will have a giant hole in it given that taxes on restaurants are a significant source of revenues for the city, and while not completely shut down, restaurants are now seriously restricted in their activity, not to mention that students will not be returning this semester, and they provide a lot of business. In short, the city will face sever budgetary problems as the now occurring recession proceeds. It is not only Harrisonburg that faces this problem, but probably just about every state and municipality in the United States.

Obviously this is currently low on the priority list of most people, and while Congress has now voted for a stimulus bill that will help out indiviuals and businesses, and another may be on the way, so far there has not been a whisper regarding a likely need to help out state and local governments, who, after all, contribute more to the US GDP (and employment) than does the federal government, which mostly just ransfers money, except for the DOD in substantial terms. The problem is that unlike the federal government, nearly all state and local governments face balanced budget rules for their current activities, with most needing to pass bond referenda for specific projects in order to borrow money. So when the revenues fall short, which they shortly will start to do for all these state governments, they will face the choice of cutting spending and laying off workers or raising taxes on populations facing sharply reduced incomes and employment. The sooner the federal government recognizes this and starts to do something, the better, although probably for now natonal politicians are hoping this will all be over before too much damage happens to the local governments, to the extent they are thinking about this at all, which I doubt.

I note that in the Great Recession, this problem was recognized, and the 2009 fiscal stimulus plan by Obama included as about a third of its spending the distribution to state and local governments of revenue sharing. This did help out their problems that arose at that time. Doing so again I think would be wise, but again, for the moment this problem is under the radar at the national level.

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