Analysts are projecting a cumulative deficit of $97 billion for the states during that period. Maryland, Virginia and the District of Columbia all are facing mid-year budget problems for fiscal year 2009.

While the rosy fiscal times enjoyed by the states over the past few years have clearly disappeared, important questions need to be addressed before rubber stamping a multi-billion dollar bailout of the states: (a) What was the cause of the current budget problems in the states? (b) Should the federal government spend taxpayer dollars to bailout the states in this economic downturn?

States are not facing budget deficits because they don’t tax enough. The real problem facing states is the fundamental issue of overspending taxpayer dollars. State spending has grown at an unsustainable rate over the past decade. In fact, state spending is up 124 percent over where it was just 10 years ago, and state debt increased by 95 percent during that same period.

In many cases, the states that are facing the worst fiscal climates are the very same states that engaged in reckless spending. During his recent testimony before the House Ways and Means Committee in Washington, South Carolina Gov. Mark Sanford noted that, “California increased spending 95% over the past 10 years (federal spending went up 71% over the same period). To bail out California now seems unfair to fiscally prudent states.”

His point is quite germane. Why should taxpayers who live in states that were fiscally responsible subsidize states that were not? Since families and businesses are required to live within their means, it is clearly time for state governments to do so as well.

 

The federal government should not be in the business of rewarding states that have simply overspent taxpayer dollars. Over the past few years, many states have spent money like drunken sailors. It’s not right to expect the American taxpayer to pick up the tab.

As legendary economist Arthur Laffer recently wrote in the Wall Street Journal, “Whenever the government bails someone out of trouble, they always put someone into trouble.” In this case, a bailout for the states means trouble for taxpayers.

There is another very good reason why state officials should be worried about a federal bailout. When has the federal government ever given money to the states without countless strings attached?

A study conducted by ALEC during the post 9/11 economic downturn estimated that “every one dollar more of federal assistance increases state and local budget deficits by over 62 cents.” It is clear the many strings accompanying federal dollars impose significant burdens on the states.

During his testimony, Sanford urged Congress to “accept that there may be better routes to recovery than a blanket bailout, including offering states like mine more in the way of flexibility and freedom from federal mandates instead of a bag of money with strings attached.”

State budgets have faced financial duress many times before because of overspending, and probably will again in the future. History suggests federal bailouts are not the answer, as they decrease state sovereignty, incentivize future fiscal irresponsibility, and reward fiscally imprudent states at the expense of fiscally responsible states.

Economist Richard Vedder said it best, “In short, federal bailouts are not a solution. They are the equivalent of giving booze to alcoholics – providing at best some temporary respite, but aggravating fundamental problems, in this case overspending.”

Unfortunately, the “do something” disease will continue to plague Washington for the foreseeable future. If this results in spending additional taxpayer dollars to rescue states who mismanaged taxpayer dollars in the first place, it will only spiral them into a cycle of federal dependency, further encouraging fiscal irresponsibility. Let’s hope that is not the case.

Jonathon  Williams is director of the Tax and Fiscal Policy Task Force for the American Legislative Exchange Council (ALEC).