balanced budgets

Back in the Contract with America days, a Balanced Budget Amendment was a major tenet of Republican policy, and a couple of times, it came close enough to passing Congress to inspire furious lobbying and vitriolic sky-is-falling claims from the Democrats. 

A balanced budget requirement isn't some radical pie-in-the-sky idea. 49 out of 50 states have it. The good news is that it works -- those states are actually forced to balance their budget. The bad news is that it's often ugly, with drastic spending cuts and tax increases in many states in the current budget year. 

Albeit more responsible than rampant deficit spending at the federal level, the states aren't any less short term in their thinking than the feds. In good years, state governments rush to spend the surplus only to abruptly cancel programs in a recession -- because there's no real incentive to bank surpluses against a downturn or use state rainy day funds. A budget $5 billion in surplus is just as balanced as one with $0 in surplus, so the politicians might as well spend the money currying favor with voters.  

The only way I can think of to stop this problem is to extend the horizon of the balanced budget from one year to five years. Essentially, the budget would have to be in balance over the course of 5 years, covering most recessions with 2 or 3 years of recovery. 

In bad times, states could deficit spend -- by no more than the surpluses of the previous four years. In good times, states would be forced to bank surpluses -- particularly if the past few years were economically tough. 

One downside is that politicians use it to recreate the present, with budgets just barely in balance across the board, but more likely than not, the politically convenient thing to do would be to slip into a deficit for one or two years, thus kicking off a virtuous circle where subsequent years' budgets would not only have to be in balance, but the extra debt accumulated during a recession would have to be paid off. This could head off irresponsible spending binges in good times and keep state budgets on more of an even keel. 

It's true that budgets wouldn't have to be balanced every year -- though the overall fiscal impact is the same -- but it sure beats the farce of Washington needing to bail out the states when they run off the rails. 

This is a gift on so many levels. New York governor David Paterson doesn't seem to have the stones to hike sales and income taxes across the board, so the result is a series of 88 tax increases on services people use every day -- like iTunes downloads and taxis:

The record labels couldn't do it, but New York's Governor wants to make Apple (AAPL) iTunes shoppers pay more than 99 cents per song.

Much of Wall Street is gone now and so are the fat tax revenues it used to earn for New York state.

In order to close a resulting $15.4 billion budget gap, New York Govenor David Paterson wants proposed 88 new fees and taxes.

Among them, an "iPod tax" on the sale of downloaded music and other "digitally delivered entertainment services."

The Daily News reports that the the Governor also wants to tax movie tickets, taxi rides, soda, beer, wine, cigars and massages. Clothes under $110 would also lose their tax exemption. Cable and Satellite TV would become subject to sales tax.

This is eerily reminiscent of the sky high Dinkins-Cuomo hotel occupancy tax rates. When Rudy Giuliani cut them, it sent an immediate signal that New York was open for business, literally and figuratively. Our candidate for governor, and it could be Giuliani, now has a ready-made issue: kill the iTunes tax. And restore a sense in which New York is one state, not an agglomeration of petty interests to be bought off by tax differentials. Comically, Paterson is going to force you to drink diet soda by taxing it less and directing the proceeds to obesity prevention. (No word yet on Albany's obese state budget.)

This is a template that could resonate state-to-state. As Soren has detailed, the states face an unprecented fiscal emergency. And most statehouses are now controlled by Democrats. Many governor's seats will be open -- a lingering impact of the 1994 tidal wave when so many states pressed the reset button, electing and re-electing Republicans. Their 2002 replacements, mostly Democrats but some Republicans, are now largely term-limited.  

This necessitates three things. First, governor's races should be a massive focus of attention in then next two years. Instead of being a sideshow for the next RNC, in their typical DC-centric quest to prop up our numbers in the Senate and House, we should be putting most of our eggs into winning statehouses and salvaging what we can out of the 2010 redistricting cycle in state legislatures.

Second, Republicans at the state level need to get their story straight on tax increases and bailouts. No Republican looking to run statewide in 2010 should have any complicity in "revenue enhancements" or any suggested federal bailout of the states so we can plausibly seen as agents of change and claim a mandate for smaller, more responsible government at the state level.

Third, with out-of-control health care costs being a big driver of spending at the state level, will the GOP put forward a compelling agenda on controlling health care costs? The health care debate at the federal level has focused mostly on the question of access -- but the problems people experience most directly are on different axes: cost and quality. With waste accounting for up to half of U.S. health care spending, it is the states -- as the biggest direct consumers of health care -- that have the biggest incentive to do something about it. Will any of them step up and do something radical?