THE “NEW FEDERALISM”: SEND THE BILL TO THAT GENTLEMAN IN THE HINTERLANDS…AND MAKE SURE YOU GET A GOOD PICTURE, OKAY?

3/18/13

In one of yesterday’s already seminal posts on the poltroonish posturing at CPAC (CPAC:  CAN’T PLACATE A (GENUINE) CONSERVATIVE), I pointed out that the Republicans were at least as vague as the Democrats in the spending cuts they were proposing.   This is entirely understandable; both parties are composed of professional politicians who decided at an early age to “go into politics” and quake in fear at the very notion of having to get a real job.  Pointing out whose ox is getting gored is far more dangerous than braying against “government spending” and counting on the audience’s assuming that what you mean is “government spending on someone else,” but I digress. 

Before making the point about the meaninglessness of vague proposals to cut spending, I wrote

The “conservatives” propose lower taxes at the federal level, which is great, though it doesn’t address the real problem, grist for a later, but hopefully not much later, mill.

That later mill has arrived.  

One of the reasons yours truly got interested in politics was that, as an overly precocious youth, I was concerned that government had gotten too large and intrusive and that taxes were too high, sapping the vitality of the private sector and the human spirit.  Continuing on this path would eventually lead to a dyspeptic nanny state in which people’s creative spirits and urge for fulfillment, as they defined it, would be replaced by a servile dependence on an omnipotent government that would dispense largesse on those it arbitrarily deemed worthy.  So I am the last person who would argue that taxes are too low.   (I should have gotten interested in politics for the opportunities doing so would have provided for personal financial advancement, like so many guys in my old neighborhood, but I, as it turns out, was not nearly as smart as most of my neighbors, but I again digress, but at least I do so parenthetically.) 

That having been said, taxes at the FEDERAL level are not all that onerous.  In the fiscal year that ended 9/30/12, federal revenues, spending, and resultant deficit were as follows:

	Pct GDP	Dollars, trillions
Revenue	15.7%	$2.44
Spending	22.7%	$3.53
Deficit	7.0%	$1.09

Federal spending was higher than its recent (last twenty years or so) historic norm of 18% to 20% of GDP and should be brought down.   Good luck with that, but I digress again.   However, as much as it pains me to say it, tax revenues were far lower than their historic norm of 18% to 19% of GDP.   These numbers will change for the current fiscal year (FY 2013); spending will be slightly lower and taxes will be slightly higher as percentages of GDP, and hence we are projected to see our first sub-trillion dollar deficit since FY 2008.   But the numbers will not be all that different from FY 2012.  There are a lot of reasons that transcend tax rates or loopholes that federal revenues as a percent of GDP are so low, and the still slow economy is one of them, but there is no arguing that federal revenues as a percent of GDP are at or near recent historic lows.

None of you, I am sure, feel undertaxed, and you are correct.   But most of the growth in the tax burden and, for most people, most of the tax burden, is not at the federal level.   Most of what we complain about in this regard is state and local taxes…state income taxes, sales taxes, gasoline taxes, property taxes, etc.   Perhaps my perspective is distorted by living in Illinois, where our state income tax was increased by 60% recently, but just about every area of the country has seen increases in state and/or local taxes.

So what do the Republicans propose?   To the extent they get at all specific about cutting spending, one of their favorite means of cutting spending is “returning programs to the states.”   For example, one of the key planks of Representative Paul Ryan’s plan to get federal health care spending under control is to transfer more, or all, responsibility for Medicaid to the states.   (See my 3/13/13 piece, ADDRESSING THE PROBLEMS OF MEDICARE:  MR. RYAN STAYS IN WASHINGTON.)   For the most part, this is a good idea; if services must be provided by government, it is best to have those services provided by the level of government closest to the voters and taxpayers, which is state or local governments, at least in theory.   And it’s good to think that someone considers the states as more than arms of the federal government, which seems to have been the growing popular notion for the last hundred years or so.

The problem arises, as most problems do, with the money.  A block grant from Washington is usually involved in such plans to delegate responsibility for programs to states, but much of the inspiration for such delegation comes from the desire to save the federal government money.  So, almost by design, the block grant will not cover all the spending the states must undertake.  The GOP, in proposing such “new federalism” touts the managerial skills of the nation’s governors, and they are right, at least in relative terms.  Governors are generally much better managers than presidents and some are truly outstanding.  State legislatures are generally more competent and reasonable than Congress.   But the bar in both cases is so low that it has burrowed itself deep within the earth.  The state guys are politicians, and thus are by nature very limited and ordinary, at best, human beings.   They are not modern day Rumpelstiltskins who can spin gold out of straw.   In most cases, delegating responsibility for programs to the states will involve the already strapped states’ having to generate more revenue to fund those programs.  So state and local taxes will have to go up.

The urge to “cut spending” by dumping it in the states’ laps, one of the few substantive ideas for cutting spending coming out of the GOP (which, incidentally, is a few more than have come out of the other side of the aisle), does not really cut spending by more than the negligible amounts that can be derived from better management at the state level.  It merely relocates the spending.  That might be good; it might not.   Those of us who live in Illinois, for example, might feel more comfortable handing over our hard earned spondulicks to the foppish rapscallions in Washington than to the outright criminals in Springfield.   But the “new federalism” will only result in increased state and local taxes, which are already too high and growing too quickly.  

Spending restraint at the federal level, should it ever become more than a pipe dream, would be welcome, largely because it might, and only might, permit some tax relief at the federal level.  But federal taxes, on a relative basis, are already not all that onerous.  If the only substantive plan to reduce them involves increasing already onerous, and getting more so, state and local taxes, what, at least from a financial perspective, is the point?