Fiscal Austerity and the Federal System

Paul L. PosnerGeorge Mason University

Current U.S. federal fiscal system is unsustainable

• Major shifts in social and economic forces generating revenue and spending pressures – Globalization– Advancing technologies– Knowledge based economy– Aging of population– Rise in health care costs

BABY BUST, BABY BOOM, BABY BUST

1920

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

2065

2070

2075

2080

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0 Fertility Rate (Births per woman)

Note: Projections based on intermediate assumptions of the 2002 Trustees’ reports.

Source: The 2002 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.

LABOR FORCE GROWTH

197519761977197819791980198119821983198419851986198719881989199019911992199319941995199619971998199920002001200220032004200520062007200820092010201120122013201420152016201720182019202020212022202320242025202620272028202920302031203220332034203520362037203820392040204120422043204420452046204720482049205020512052205320542055205620572058205920602061206220632064206520662067206820692070207120722073207420750

1

2

3

Percent change (5-year moving average)

Note: Projections based on intermediate assumptions of the 2002 Trustees’ reports.

Source: The 2002 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.

Medicare Beneficiaries

SOURCE OF LONG-TERM GROWTH(CBO’S ALTERNATIVE BASELINE, PRIMARY SPENDING AS A PERCENT OF GDP)

Source: Congressional Budget Office, The Long-Term Budget Outlook (June 2009), http://www.cbo.gov/doc.cfm?index=10297. Note: The Alternative long-term baseline follows CBO’s published 10-year baseline projections with some changes to the economic and demographic assumption which incorporates policy changes that are widely expected to occur and that policymakers have regularly made in the past.

FACTORS EXPLAINING FUTURE FEDERAL SPENDING ON MEDICARE, MEDICAID, AND SOCIAL SECURITY( AS A PERCENTAGE OF GDP)

Source: Congressional Budget Office, The Long-Term Budget Outlook (June 2009), http://www.cbo.gov/doc.cfm?index=10297.

All Proposals Exceed the 2014 Cap

2012Enacted

2013After

Sequester

2014Caps

2014House

2014President& Senate

DefenseDiscretionary

554 509 498 552 552

Non-DefenseDiscretionary

517 477 469 415 506

Total 1,071 986 967 967 1,058

Source: Barry Anderson, National Governors Association. August, 2013.

Long Term Federal Debt

State sales tax bases have been eroding

14

The Great Recession and States

Long Term State and Local Fiscal Outlook

State and Local Fiscal Gap

Composition of State and Local Spending

The evolution of fiscal interdependence and conflict

• Dual Federalism• Cooperative Federalism• Coercive Federalism• Contentious Federalism

20

State Revenues: Key and Increasing Role of Federal Grants

Source: GAO Analysis of U.S. Census Bureau Government Finance Statistics.

Note: The components of general revenue are own-source revenues (taxes, charges, miscellaneous revenues, etc.) and intergovernmental revenues (revenues received from federal and local government). These data represent aggregates for the sector. State revenue sources vary considerably by state. For example, seven states have no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two others, New Hampshire and Tennessee, tax only dividend and interest income.

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20110

100

200

300

400

500

600

TRENDS IN FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS(Outlays in billions of dollars)

Payments for IndividualsPhysical CapitalOther GrantsTotal

Year

Cons

tant

(FY

2005

) Dol

lars

Federal Grants to State and Local Governments

• Categorical – Over 900 programs• Block Grants – 25 programs• General purpose assistance – 0 programs• Tax expenditures

– Deductibility for state and local taxes– Tax exemption for state and local bonds

Tools of Regulatory Federalism

• Direct order mandates• Program Specific Grant Conditions• Crosscutting Requirements• Crossover Sanctions• Preemptions

– Total – Partial

Centralizing Forces

• National and global economy• Shifting nature of political incentives• Growth of more competitive national media• Interest group activism• Collapsing constraints on the federal role• Chronic federal fiscal pressures• Eclipse of federalism as a primary value

Number of Federal Preemption Statutes Enacted per Decade

State Driver’s Licensure: Growing Federal Encroachment

• Air quality requirements• Motor voter registrations• Drunk driving requirements• Commercial drivers license requirements• Real ID Act

Emergence of State Resistance

• No Child Left Behind• Real ID• Recovery Act programs• Health Reform

Growing Role of States

Inflection Point? Fiscal Austerity and the Intergovernmental System

• Fiscal Pressures Sweep in From Outside the Beltway• The Three Fiscal Commissions• Conservative Tide in the Congress and the States• Federal Retrenchment May Affect The Federal Role

– Banker for Recessions– Federal Grants– Regulations– Tax expenditures– Tax policy

Centralizing Effects of Austerity for the Federal System

• Growing Federal Reliance on States for Implementation of Federal programs

• Growing Federal Reliance on Mandates• Growing Dependence of States on Federal

Grants• Potential Nationalization of State Tax Sources

Centralizing Effects of Deficit Commission Proposals

Reduced discretionary budgets will prompt cuts in federal grants

Tax expenditures reexaminedState and local deductionTax exempt bonds

Cost shifts and mandates Extend social security coverage

Revenue nationalization - VATCap and consolidate

Medicaid long term careHomeland security grants

Federalism in an Age of Austerity

Go it alone federalismPartial and ineffective solutionsPublic confusion

Cost shiftingUnfunded mandatesFiscal substitution

Fiscal coordinationWin-win strategiesVATSorting out responsibilities

Barriers to Intergovernmental Collaboration

• Weak electoral incentives for national leaders• Conflict among state and local officials• Insufficient focus on long term• Absence of national intergovernmental

institutions

Expand States’ Capacity to Cope in An Age of Austerity

• Strengthen capacity of state groups to represent longer term states’ interests

• Rainy day fund expansions• Long term budgeting• Enhance collective capacity for joint national, not

federal, programs– Sales tax simplification– Insurance standards– Potential collective action for pension solvency?

Future Prospects for Reform: Intergovernmental Institutions:

• 1980– ACIR– OMB– GAO– Congressional IGR

subcommittees– Academy for State and

Local Government

• 2010– CBO cost estimation– GAO