The United States is grappling with significant budget shortfalls in 44 out of its 50 states as of fiscal year 2012, starting July 1, 2011. California faces the most severe deficit, with a $25.4 billion shortfall, representing nearly 30% of its 2011 budget. Other states like Nevada, New Jersey, and Texas also face substantial budget deficits as percentages of their budgets.
President Obama’s proposal to remove the municipal bond tax exemption for individuals in the 28% tax bracket and higher could exacerbate state budget issues. This move might trigger a sell-off in municipal bonds, increasing borrowing costs for states and potentially leading to more budget shortfalls and job losses.
The year 2011 has been labeled as a reckoning year for state budgets by analysts, evidenced by the sell-off in municipal bonds during the first quarter. Surprisingly, this financial strain seems to have little impact on the robust performance of the economy and stock markets, suggesting a general apathy towards the state budget crises.
The solutions for addressing state budget issues seem straightforward but politically unpalatable: reduce spending and increase taxes. I’ve suggested a “Renter’s Tax” to broaden the tax base, which has been met with resistance, particularly from renters who believe part of their rent covers property taxes. However, this overlooks the disparity in the tax contributions between renters and homeowners.
The stakes are high. If the most indebted states declare fiscal emergencies or go bankrupt, the economic repercussions will be felt by everyone—not just the wealthy. The stock market could crash, municipal bonds could lose value, and widespread layoffs could occur, leading to increased taxes regardless.
In summary, if you prefer big government, the ongoing fiscal irresponsibility at the state level might seem paradoxical given the trust placed in politicians to manage budgets. All states might just wait it out until the federal government steps in, as seen with the bailouts in Europe. Watching the “Moral Hazard of America” unfold again seems inevitable as 2011 progresses.
