Just say no to federal bailouts of state governments

A growing cabal of governors – both Republican and Democrat – have joined together and called on the federal government to bail their states out in the coronavirus’ wake and presumably paper over pre-existing budgetary shortfalls. After all, both red and blue states are in financial straits.

Experts even believe that fiscally conservative Georgia will face a $4 billion shortfall over the next 15 months. As a result, Governor Brian Kemp has wisely called on state agencies to cut their budgets by 14 percent, which will not be easy. Nevertheless, while other governors are requesting aid from Washington DC, Congress should be reticent to expend such funds and governors should think twice before lobbying for the bailout.

It’s hard to pinpoint how far in the red many states will be when the epidemic dissipates, but a coalition of governors has petitioned Congress for “at least $500 billion” to plug budget holes. Despite U.S. Senate Majority Leader Mitch McConnell initially scoffing at the idea, Congress has a long history of making terrible financial decisions.

As it stands, the national debt is around $25 trillion – roughly about $200,000 of debt per taxpayer. Following Congress’ latest stimulus/bailout, which was the largest in history, the 2020 federal deficit sits at over $3.8 trillion and is poised to continue surging. Suffice it to say, the U.S. government’s financial standing is tenuous.

If the feds ultimately bailout the states, the U.S. government would have to issue debt, which it can since it isn’t required to have a balanced budget. This would simply pile onto our already seemingly insurmountable debt and force taxpayers to eventually repay not only what was borrowed, but also the interest. While a federal bailout might provide some short-term relief for state governments, it would push the U.S. government closer to a financial disaster and lead to long-term pain as taxpayers repay it with interest.

Believe it or not, states are equipped to deal with their own financial crises. Unlike the federal government, many states, like Georgia, have rainy day funds to ameliorate such scenarios; state governments craft and manage their own budgets and have the power to raise and lower taxes; and several states have ample time to rectify their budgetary woes. Georgia, for instance, hasn’t passed its Fiscal Year 2021 budget yet but has several legislative days left to do so – meaning there’s plenty of time to get the Peach State’s finances in order. Many other states have already passed a budget and adjourned for the year, but they, like Georgia, have the power to reconvene for a special session to deal with any lingering issues.

What’s more, the majority of states either have statutory or constitutional requirements to have balanced budgets – a notion that our spendthrift Congress would find alien. As such, most states would have to adjust tax rates and/or spending to balance their budget because of the epidemic – thus addressing the budget crisis without going into debt. While this could prove difficult in the short-term, it would sidestep the problem of allowing the federal government to borrow a half a trillion dollars and force taxpayers to repay it with interest.

Depending on how it is designed, a federal bailout of state governments could largely be the same as rewarding shortsighted behavior in other states. While nobody could have predicted the coronavirus, much of the would-be bailouts may fund unsustainable state spending on various states’ programs like pensions in Illinois. In fact, the state requested over $40 billion, including $19.6 billion for Illinois state and local pension funds. But why should Georgia taxpayers be required to help bailout Illinois’ ill-conceived programs, especially when Illinois officials have the power to do it themselves? Further, if the federal government bails them out, then why would Illinois, or any other state for that matter, ever reform wasteful government programs? Such a bailout would seem to indicate that the feds will always swoop in and save the day.

The fact that the knee jerk reaction of many governors – Georgia excluded – was to beg the federal government for a bailout without cutting spending or raising taxes is irresponsible. States have all of the tools at their disposal to balance their budgets. Reducing state spending and/or raising taxes may not always be politically popular, but these are states’ primary choices. However, some state governors presumably don’t want to make tough decisions. They’d prefer to let the federal government do it for them. That way the states appear to bear none of the blame for the resulting fallout.

Rather than immediately trying to defer responsibility, states ought to first try to use their powers to fix their own problems. In the end, taxpayers will thank them.