The President’s fully detailed budget will not be made available until mid-May. However, we already know from the outlines of proposals that have been made public that the Trump administration intends to turn over great swaths of federal education, transportation, environmental and health care responsibilities to state and local governments.
The policy logic dictates that delegating responsibilities to lower levels of government allows for greater efficiency in delivering services as well as flexibility to adapt to state and local circumstances and culture. More fundamentally, Republican political orthodoxy is rooted in the notion of states’ rights.
The Trump tax reform plan proposes big cuts in federal tax rates for individuals and businesses. Without large offsetting increases in the tax base or cuts in federal spending, the deficit effects of the Trump administration policy plans are large and the ability of the federal sector to accompany a transfer in responsibilities with a transfer in funding is limited.
Sadly, the fiscal status of the states is no better. Failure of the real estate sector, hence property taxes, to recover has hit state and local revenue capacity as has the implosion of the retail sector. States and localities appear to be in no condition to take on substantial additional responsibilities.
In the 1980s, state and local revenues grew in line with the overall economy and during good economic times, much faster. Beginning in the 1990s, state and local revenue growth slowed but still grew at about or slightly below the rate of U.S. GDP.
However, in the aftermath of the 2001 recession, state and local revenues plummeted. Revenue growth rebounded, largely on the back of property tax revenues during the pre-crisis years. This created something of a bubble in state and local spending, especially for Medicaid.
When the financial crisis hit, the federal government stepped in and provided almost $200 billion in direct stimulus to states to meet Medicaid and other commitments. Despite this level of federal support, state and local revenues collapsed in absolute terms and relative to GDP even with the federal share of total state revenues rising to almost 40 percent. The financial crisis was the first time since World War II that both state and local revenues declined by such significant amounts at the same time.
Immediately after the financial crisis, state and local revenues recovered and grew at healthy rates in 2011 and early 2013. However, since 2013, that growth has slowed dramatically in absolute terms and relative to the overall economy. (Chart)
State and local finances are hard hit by the failure of the real estate sector to recover and the decline in the retail sector. Property tax, income tax and sales tax revenues, which are the major sources of state and local revenue, are underperforming compared to their historical average growth rates during expansions.
While federal, state and local governments are jockeying to shift the greatest responsibilities and corresponding tax burden from one to the other, neither the federal nor state and local government has the fiscal resources to meet important promises already made in health, infrastructure, education and social services.
Either government will have to match private sector efficiencies in delivering many of these services —which will require, among other things, a radical revolution in worker rights and unionization — or states and localities will have to raise personal income tax rates to finance government responsibilities that the Trump administration seems committed to hand over. Neither of these are choices that any level of government appears ready to make.
Login in below to access content exclusive to clients of The GailFosler Group.
Not a client yet? For more information on the benefits of becoming a client, please contact us.