State Debt Loads are Soaring

We all know that Uncle Sam is drowning in red ink–if you need a humorous reminder check out Remy’s “Raise the Debt Ceiling.” Well, it turns out that states are not in much better shape. According to a new study by Harvard Economist Jeffrey Miron, for the Mercatus Center, states will reach dangerous debt levels in 20 to 30 years. From the study “The Fiscal Health of the U.S. States” (pdf):

This paper examines the fiscal health of the 50 U.S. states and reaches five conclusions. First, state government finances are not on a stable path; if spending patterns continue to follow those of recent decades, the ratio of state debt to output will increase without bound. Second, the key driver of increasing state and local expenditures is heath-care costs, especially Medicaid and subsidies for health-insurance exchanges under the Patient Protection and Affordable Care Act of 2009. Third, states have large implicit debts for unfunded pension liabilities, making their net debt positions substantially worse than official debt statistics indicate. Fourth, if spending trends continue and tax revenues remain near their historical levels relative to output, most states will reach dangerous ratios of debt to GDP within 20 to 30 years. Fifth, states differ in their degrees of fiscal imbalance, but the overriding fact is that all states face fiscal meltdown in the foreseeable future.

Check out this video to see when your state reaches the danger zone.

Hat tip to Matt Mitchell at Neighborhood Effects

Fiscal Federalism 12: Federal Aid by Agency

In yesterday’s post on Federal Aid to the States, I asked if anyone knew why states such as New Hampshire and Texas received so much less federal aid, on a per capita basis, than their surrounding neighbors. Table 1 below reveals the answer.

To hunt down the culprit I decided to turn to my favorite two-state comparison–New Hampshire and Maine. One reason why I like to compare the two states, besides the fact they are economically and politically opposites, is that they have nearly identical populations right now. As such, I can show the dollar amounts without having to adjust them into per capita terms since the relative difference won’t change.

So let’s dive into the data. First, notice just how long the list is of federal agencies that dole out aid to the states.  If you are into pork, there is a federal agency out there for you. The obvious question from this list is . . . are there no limits to what the federal government can do?

Despite having identical populations, Maine receives $1.4 billion more from Uncle Sam than New Hampshire–$3.4 billion versus $2 billion, respectively. Where does this “Maine subsidy” come from? The vast majority of the difference is under the Department of Health and Human Services: Centers for Medicare and Medicaid Services to a tune of $1.1 billion.

So Medicaid is the single largest driver of the difference in Federal aid to the states accounting for $256 billion of the total $552 billion doled out. It dishes more aid than the Department of Agriculture ($31 billion), Department of Education ($45 billion), Department of Housing and Urban Development ($47 billion), Department of Labor ($10 billion) and Department of Transportation ($57 billion) COMBINED!

So the key to freeing your state from federal dependency, um, aid, is to control your state’s Medicaid program. Doing so will also reduce the “crowding out” of the private sector by the public sector which I’ve discussed previously– meaning a larger private sector will also result in greater economic prosperity.

Table of Federal Aid to State and Local Governments by Agency for Fiscal Year 2009

Younger American Generations Beware . . . “Entitlement Slavery” Awaits

Finding Freedom

Every American under the age of 40 should shudder at this quote from a Foxnews story–NY Dem Wins Seat in Heavily GOP District:

Hochul’s victory gave a lift to Democrats still reeling from an electoral drubbing last November that cost the party control of the House. It also bolstered their resolve to push back on GOP efforts to cut Medicare and other entitlements — efforts that have drawn support among some tea party members but are widely opposed by independent voters.

“The three reasons a Democrat was elected to Congress in the district were Medicare, Medicare and Medicare,” Democratic Congressional Campaign Committee Chairman Steve Israel, D-N.Y., said in an interview . . .

Hochul said she would work to balance the federal budget but refused to “decimate” Medicare . . .

Her supporters at a union hall in Amherst, outside Buffalo, chanted “Medicare! Medicare!”

Folks, this may make for good politics, but it is an economic impossibility.  This chart from the Heritage Foundation shows that all revenue post-2049 will be consumed by entitlements.  From the chart caption:

If the average historical level of tax revenue is extended, spending on Medicare, Medicaid and the Obamacare subsidy program, and Social Security will consume all revenues by 2049. Because entitlement spending is funded on autopilot, no revenue will be left to pay for other government spending, including constitutional functions such as defense.

If this election becomes a national trend, then folks under the age 40 may be staring a form of indentured servitude right in the face–lets call it “entitlement slavery” . . . brought to you by the ballot box because there are simply more voters over 40 (who also have a higher voter turnout rate) than those under 40.

Taxes Matter VIII: Will Higher Taxes Put Brake on Health Care Spending?

An intriguing and distressing paper by Jonathan S. Skinner (Dartmouth) and Katherine Baicker (Harvard) titled “Health Care Spending Growth and the Future of U.S. Tax Rates” (NBER Working Paper 16772) finds that growing federal health care costs will drive up future income tax rates to as high as 70 percent.  However, before that nose-bleed level is reached there will be action to stem the growth in health care because the economic damage ($1.48 per dollar of revenue raised) of the higher tax rates will simply be too great to bear.  From the abstract:

Higher Income Tax Rates Due to Higher Health Spending

The fraction of GDP devoted to health care in the United States is the highest in the world and rising rapidly.  Recent economic studies have highlighted the growing value of health improvements, but less attention has been paid to the efficiency costs of tax-financed spending to pay for such improvements.  This paper uses a life cycle model of labor supply, saving, and longevity improvement to measure the balanced-budget impact of continued growth in the Medicare and Medicaid programs.  The model predicts that top marginal tax rates could rise to 70 percent by 2060, depending on the progressivity of future tax changes.  The deadweight loss of the tax system is greater when the financing is more progressive.  If the share of taxes paid by high-income taxpayers remains the same, the efficiency cost of raising the revenue needed to finance the additional health spending is $1.48 per dollar of revenue collected, and GDP declines (relative to trend) by 11 percent.  A proportional payroll tax has a lower efficiency cost (41 cents per dollar of revenue averaged over all tax hikes, a 5 percent drop in GDP) but more than doubles the share of the tax burden borne by lower income taxpayers.  Empirical support for the model comes from analysis of OECD country data showing that countries facing higher tax burdens in 1979 experienced slower health care spending growth in subsequent decades.  The rising burden imposed by the public financing of health care expenditures may therefore serve as a brake on health care spending growth.

Is it me or are they basically saying the world has to blow up before we fix Medicare and Medicaid?  Not exactly the proactive solution . . .

The paper in its most recent form is gated behind NBER’s paywall.  However, I was able to find an earlier version of their paper on NBER’s website dated October 2010: Jonathan S. Skinner (Dartmouth) and Katherine Baicker titled “Health Care Spending Growth and the Future of U.S. Tax Rates” (pdf)

Fiscal Federalism VII: Texas to End Medicaid?

In a previous blog a new study by Mercatus found that federal grants often drive up state and local taxes because the federal funds dry up leaving them to pick-up the tab.  Another way this can happen is through programs with a federal match.  In the quest to get the federal dollars, state and local governments must raise some revenue of their own.  The largest of these is the Medicaid program–to see how various states are addicted to federal Medicaid money see this post.

Today the New York Times is reporting that Texas is planning to do something about this inversion of fiscal federalism–do away with the federal Medicaid program and put in place a state-run system.  Here’s why:

“With Obamacare mandates coming down, we have a situation where we cannot reduce benefits or change eligibility” to cut costs, said State Representative Warren Chisum, Republican of Pampa, the veteran conservative lawmaker who recently entered the race for speaker of the House. “This system is bankrupting our state,” he said. “We need to get out of it. And with the budget shortfall we’re anticipating, we may have to act this year.”

The Heritage Foundation, a conservative research organization, estimates Texas could save $60 billion from 2013 to 2019 by opting out of Medicaid and the Children’s Health Insurance Program, dropping coverage for acute care but continuing to finance long-term care services.

As the old saying goes, “Don’t Mess with Texas!”