Should Cash-Strapped States Get a Federal Bailout?

By Christine Hall | July 7, 2008 | 8:29 PM EDT

( - The president's fiscal year 2004 budget is drawing criticism from Democrats and state lawmakers who want more federal cash from the federal government to plug massive budget holes projected in two-thirds of the 50 states.

States are facing a cumulative budget gap of $25.7 billion for Fiscal Year 2003, due in part to a bad economy, lower tax revenue, and high Medicaid and homeland security costs.

And 2004 looks even worse - a projected $68.5 billion aggregate deficit, according to a new survey by the National Conference of State Legislatures (NCSL).

"We would like...the federal government to ante up to the plate, if they require us to do certain things in terms of election reform or the No Child Left Behind [Act]," said Oklahoma State Senator Angela Monson (D-Okla. City), president of the NCSL.

"We want also for Congress and the administration to understand that tax policies have a direct effect on many of our state budgets and be considerate of those policies," said Monson, referring to the president's tax relief proposals.

A federal bailout of state economies would help the national economy, according to Monson. "When the states' economies are so slows down the entire nation's economy," she said.

U.S. Senate Minority Leader Tom Daschle (D-S.D.) recently unveiled a Democratic stimulus plan that would give states an extra $40 billion to spend on anti-terrorism initiatives, education and Medicaid.

But Amy Call, spokesperson for the Office of Management and Budget (OMB), brushed aside criticism that the president's budget doesn't spend enough on states.

Federal spending on states has grown nine percent in recent years, but "their spending has only grown about seven percent per year. So actually, the federal government has been a net gain for the states," said Call.

"We have increased dramatically the amount of money we've given the states through block grants, Medicaid, and other things," said John Feehry, spokesman for House Speaker Dennis Hastert (R-Ill.).

Feehry expressed frustration with Democrats who are calling for more spending while at the same time accusing the president of fiscal irresponsibility for proposing tax relief.

Fiscal conservatives blame the states for over-spending during prosperous years.

"A lot of these states have been spending out of control...when their own budget surpluses were through the roof, and now, they're stuck because those revenues aren't coming in anymore," said Feehry.

"They kind of shot their wad in the 1990s," agreed Chris Atkins, tax and fiscal policy task force director for the American Legislative Exchange Council (ALEC).

"Now their backs are up against the wall, and they're all looking for someone else to bail them out," said Atkins. "They need to look at ways they can provide their services at lower costs."

John Barry, chief economist for the Tax Foundation, agreed that state lawmakers should look for budget cuts. But, he said, the federal government could help too by allowing Americans to keep more of what they earn.

"If the federal government is going to mandate...programs, another way to provide states with room to pay for the programs is to lower taxes at the federal level, thereby giving states room to increase their taxes - if voters are willing to do that," said Barry.

That would save the extra step of cycling money through Washington, D.C., and then sending it back to the states, said Barry. "It's also much better because it allows the states to raise the needed revenues in a way that the citizens of those states have voted or want to."

E-mail a news tip to Christine Hall.

Send a Letter to the Editor about this article.