State Fiscal Crises

http://www.futureofcapitalism.com/2011/01/state-fiscal-crises

In the Winter issue of National Affairs, the president of the John Locke Foundation, John Hood, warns of a coming fiscal crisis at the state level: "several states may confront the possibility of genuine default — a possibility that California briefly toyed with in 2009, and may well face again soon."

"As a share of the national economy, such state and local spending has roughly doubled over the past 50 years — from 11.56% of GDP in 1959 to 21.79% today," he writes. The big drivers are Medicaid and education spending.

More: "As of fiscal year 2008, states and localities combined had about $2.6 trillion in outstanding bonded obligations and other formal debts. By the beginning of 2010, the Manhattan Institute's Steven Malanga reports, state and local debt had risen to an all-time high of 22% of GDP, up from 15% a decade ago."

The article also looks at the distorting effect of the federal tax exemption for state and local bonds: "The interest earned by state and local bondholders is exempt from federal income taxes, which inflates the incentive to buy such bonds — in turn making state and local debt artificially cheap (and therefore exaggerating its appeal to state and local policymakers). Indeed, the exemption for state and local bonds — with a fiscal impact of about $27 billion a year — is one of the largest in the federal tax code."

by Ira Stoll  |  Jan 5, 2011 at 11:37 am Related Topics:  New York, Taxes receive the latest by email: subscribe to the free futureofcapitalism.com mailing list