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Jewish World Review Jan. 29, 2002 / 26 Shevat, 5763

Robert W. Tracinski

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Consumer Reports

The self-made state of the states | In an admission that they have no congressional leadership to offer, the Democrats didn't send Tom Daschle or Nancy Pelosi to deliver the Democratic rebuttal to the president's State of the Union address. They gave that job to Washington Governor Gary Locke, who will use his place in the spotlight to plead for a federal bailout of crashing state budgets.

This is yet another attempt by state governments to shift the blame for their budget crisis onto someone -- anyone -- except themselves.

The art of evading responsibility has been practiced most brazenly in California. In 1996, State Senator Steve Peace pushed a bogus energy "deregulation" bill through the state legislature. When this "deregulation" -- enacted through hundreds of pages of new regulations -- led to disaster two years ago, Governor Gray Davis blamed the free market and "solved" the crisis through a state takeover of the electricity industry. One of his first acts was to negotiate tens of billions of dollars in long-term energy contracts at the height of the crisis. In effect, Davis locked in high electricity prices at their peak, overpaying by billions of dollars and using up the state's budget surplus -- just as the recession began. To solve the problem, Davis recently appointed a new finance director: Steve Peace.

So the two men entrusted with solving California's budget crisis are the two men who caused it in the first place.

Most states blame their budget problems on rising health-care costs, but the numbers don't add up. Health-care spending generally makes up about 30 percent of state budgets, and those costs have increased about 13 percent in the past year. But that only accounts for a 3 percent increase in state government spending. After a decade-long economic boom, accompanied by booming tax revenues, states could easily have built up enough reserves to cover these increased costs.

The states have also blamed lost sales tax revenue as more spending has moved to the Internet. But this does not account for the main decrease in tax revenue. The biggest revenue drops are from corporate taxes and, most important, from state capital gains taxes.

The stock market has been denounced for its "irrational exuberance" during the boom of the 1990s. But the real "irrational exuberance" took place in state capitals. As taxes on investors' stock-market gains flooded into state treasuries, legislatures were unanimous in their choice about what to do with it. They spent it.

According to Pete Sepp of the National Taxpayers Union, state general fund spending from 1996 through 2001 jumped by an average of 39 percent. And that's just the average; in my home state of Virginia, the increase for that period was more than 50 percent. And even as the state capital gains tax bubble burst, state spending still rose at an annual rate of 4.2 percent during the first nine months of 2002, the latest figures available.

There are several options for solving this problem. The simplest is to roll back the new spending. But that goes against the basic assumption that caused the spending orgy in the first place: the premise that it is the job of productive citizens to make money, while it is the function of government to seize their earnings and spend it on their favorite causes. That premise, which has survived unchallenged, leads most states to favor a second option: raising taxes. If there is a crisis, they conclude, then we must not be seizing quite enough money from the state's producers.

But tax hikes can be unpopular with the voters, so there is a third, safer option: you can shake your fist at reality, blame everyone else, and wait for someone to bail you out.

But running to Congress to fix this problem is like going to a wino for advice on how to stop drinking. A few years ago, when analysts were predicting surpluses as far as the eye could see, Congress went through hundreds of billions of dollars in new pork-barrel spending. Then came recession and war. The surplus disappeared, and Congress blamed the war, the stock market, the tax cuts -- everything except their own spending binge.

The only way members of Congress could help state government officials deal with their budget problems would be to sponsor them in a support group.

Let's call it Over-Spenders Anonymous.

This support group would not require 12 steps, only one. Those who recognize that they have a problem would have to swear off the bad habit of spending other people's money.

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