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Economists warn against more state aid
States say they’ve been kept afloat during the economic downturn by critical federal aid, but, with stimulus money set to run out soon, a report from conservative economists argues that another infusion would postpone, and could worsen, states’ eventual reckoning with troubled budgets.
Last year’s stimulus bill designated hundreds of billions of dollars to states, either directly or indirectly. The aid peaked this year before dropping dramatically. States say they’re still hurting, though, and Congress is trying to figure out how much more aid to extend, and for how long.
Chris Whatley, director of the Council of State Governments‘ Washington office, said the consensus is that Congress will provide higher Medicaid reimbursements to states for six months past the December expiration but that a broader round of spending to include education and other programs is unlikely.
“That’s basically out the door,” he said. “There are those who are certainly trying to revive it, but I don’t know many in the state community who are counting on that.”
Jonathan Williams, director of the tax and fiscal policy task force at the American Legislative Exchange Council, said continued federal aid will only feed “the do-something disease in Washington,” where the federal government sees a problem and decides taxpayer money can help.
In a new report on states’ fiscal stability, Mr. Williams and several other conservative economists said the stimulus amounted to a “get-out-of-jail-free card” for state lawmakers who let their budgets grow too fast while the economy was strong but were reluctant to make cuts during slimmer times.
“The recession should have been the wake-up call: Pull back on spending. Unfortunately, the stimulus money is interfering with this normal, albeit painful, corrective step to get states permanently back on more sustainable spending paths,” they said in their report.
Part of the problem, Mr. Williams said, is that federal money comes with strings. For example, if states accepted primary and secondary education money, they were not allowed to make cuts in much of their school funding. In other instances, Mr. Williams said, states have imposed new taxes on doctors or patients at hospitals to qualify for more health care funding.
With the federal government already running a deficit, it is in essence borrowing against future taxpayers.
“It’s kind of like using your MasterCard to pay off your Visa,” Mr. Williams said. “The federal government can’t give to states anything it hasn’t already taken away from state taxpayers.”
State officials argue, though, that they had to make painful cuts even with the federal aid.
Mr. Whatley said that aid ended up plugging between 30 percent and 40 percent of states’ budget holes, leaving plenty of room that had to be made up either through higher taxes or spending cuts.
Stimulus funding for states was near $50 billion in fiscal 2009. The funding peaks this year at $108 billion and then drops to slightly more than $60 billion in 2011, according to Stateline.org. Money for education and health programs dominates in those three years.
Federal transfers generally account for about a quarter of states’ total budgets. Under the stimulus, that portion rose to about a third of state spending.
Nick Johnson, director of the liberal-leaning Center on Budget and Policy Priorities’ state fiscal project, said state revenues are slower to recover from recession, particularly with unemployment rates remaining high. That’s because so much of state budgets go to safety-net programs such as Medicaid.
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Stephen Dinan can be reached at firstname.lastname@example.org.
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