REVIEW & OUTLOOK (Editorial): The Lean, Mean States
The loudest howls about the Treasury Department's tax proposals are coming from state and local governments. It's a refrain we'll hear more of when the president offers his new budget four weeks from now. As New York's Gov. Mario Cuomo and others would have it, the feds are trying to unload their problems on the other levels, especially on the high-tax, high-service states that already take in so much of the nation's wash.</br></br>We don't want to make light of the buck-passing that is one of the wonders of our federal system. The Treasury proposals do conceal some nasty little traps, and we are not much moved by Treasury arguments that state and local tax deductions represent unfair "tax expenditures." But neither are we moved by complaints from governors about being asked to shoulder more responsibilities.</br></br>States and cities just don't make very plausible victims of Reaganomics. On the contrary, they've been much quicker to benefit than the federal government itself. The Commerce Department's National Income and Product Accounts show that state and local governments were running a total surplus in 1984's first quarter of $13.4 billion. (We're not even counting their social insurance fund surplus of $40.5 billion.) This figure can be tricky as a guide to policy, we admit. Yet it shows an impressive trend. Since the fourth-quarter 1982 trough of the recession, state and local finances have been steadily improving.</br></br>The rising black ink confounds those dark predictions we heard in 1981. Remember how federal budget cuts were going to force intolerable burdens on the states and federal tax cuts were going to be washed out by state increases? Yes there was a wave of state tax hikes, under the fiscal pressure of the 1982 recession. But the overall impact has been much less than originally thought. In 1983, state and local taxes took some 10.4% of total personal income, three-tenths of one percentage point higher than the 1981 low point of 10.1% but still far below the 1972 peak of 11.5%.</br></br>These figures bear out what Dartmouth's Colin Campbell argued some time ago. Over the long run, federal aid forces state taxes up, not down. Categorical grants lured the other levels into all sorts of programs they didn't need, such as a "people mover" for Detroit's pedestrian-shy downtown. Special interests grow up around the federal spending and demand even more state money. Detaching the grants and their strings frees state and local governments to concentrate on their real needs.