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Week of: April 15, 2001

States Should Rebate Super Surplus

by F.R. Duplantier

If state governments are enjoying record surpluses, why aren't taxpayers receiving the rebates and reductions they deserve?

"State lawmakers allege that their budgets are rising because they are [striving] to catch up on spending demands occasioned by earlier years of fiscal neglect," observe Stephen Moore and Stephen Slivinski of the Cato Institute. "State policymakers also maintain that . . . the federal government is devolving more spending responsibilities to the states . . . without a commensurate rate increase in federal funding." There's only one problem with those claims: they're not true.

In a new report from the Cato Institute, Moore and Slivinski reveal that "federal spending on grants to states and localities has been growing, not falling." They also cite "several factors that are driving down state costs and should allow states to constrain their budgets." Thanks to declining interest rates, for example, "debt service has cost states less in recent years." And then there's "the impact of a strong economy and welfare reform legislation on welfare caseloads. Welfare reform has been an astonishing success story," Moore and Slivinski assert, noting that "welfare rolls have fallen by 53 percent nationwide since 1996." They emphasize that "reduced welfare payments have saved billions of dollars. Unfortunately, states have misallocated much of those savings to new areas of spending, such as day care and job training, where governmental programs are of dubious efficacy."

Moore and Slivinski also point to "the dramatic slowdown in health care cost increases in recent years. As the private sector has moved to greater reliance on patient cost sharing, managed care, and competition," they remark, "the inflation rate for health care in the United States has fallen from 9 to about 3 percent since 1990. This too has generated an unexpected fiscal benefit for states."

Moore and Slivinski don't overlook "the steady decline in unemployment. Each year states spend about $20 billion on unemployment benefits," they report. "Today the unemployment rate is at its lowest level in 20 years, and the problem in many states is not a shortage of jobs but a shortage of workers," say Moore and Slivinski. "The increase in the number of workers paying into the unemployment compensation systems and the decline in the number of unemployed drawing benefits have created huge and ins some cases unprecedented surpluses in state unemployment insurance trust funds."

Moore and Slivinski consider it "reasonable to expect that state spending would be flat or even declining slightly -- even without a long-overdue reconsideration of the scope of state government. Instead," they lament, "the budgetary savings have simply helped finance an explosion of expenditures in other areas of state budgets. Governors of both parties have done an inadequate job of saying no to special- interest demands for funds," Moore and Slivinski charge. "And, while most Republican governors and some Democratic governors have been cutting taxes, those tax reductions have been inadequate to keep pace with the huge revenue windfalls from the strong economic expansion of the past six years." During this time, "state tax collections have exceeded expectations by a cumulative $40 billion. About two-thirds of that revenue windfall," they report, "was spent, not rebated to taxpayers."


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