Washington, DC, USA. On April 4, 2008, the Wall Street Journal ran an article, “States Move Fast on Mortgage Aid,” which summarized recent actions taken by Illinois, Maryland, Massachusetts, Minnesota and Ohio to help homeowners avoid mortgage foreclosures. Similar articles over the last several months have highlighted state leadership throughout the country in a variety of areas, including health-care reform, energy conservation and climate change.

 

But while states have provided innovative leadership over the last several years in many domestic policy areas, their ability to enact new programs and policies is being curtailed as state revenues decline and many states confront budget gaps. And recent legislation put forth by Congress will only compound the problem.

 

Alarming trends

 

This cumulative impact of the stall in economic growth on states is most notable in health care, as states struggle to implement the coverage expansions enacted in good economic times and see ambitious plans derailed. California, whose budget shortfall likely played a major role in the failure of the governor and the state Legislature to

reach agreement on universal health care, is a prime example.

 

The economic cycle is an unfortunate fact of life, and states, as always, will adjust to this ebb and flow of revenues. Far scarier than the economic downturn for states is the growing trend on the part of Congress to restrict state revenue and spending prerogatives and to replace them with congressional priorities. Two provisions in bills now making their way through Congress are important examples.

 

Higher Education Maintenance of Effort (MOE). The higher education bill currently pending in conference committee contains a provision that penalizes states any time they reduce higher education spending below the average of the last five years. This provision represents a major new mandate on 11 percent of state spending, which, on top of the Medicaid mandate that already represents 23 percent of state budgets, means that the federal government will dictate how states spend more than one-third of their revenues.

 

This provision is harmful in that it reduces state spending flexibility. But even worse, it also will have the unintended consequence of lowering state higher education expenditures in the long run because governors, knowing they will be held to this higher spending mandate during the next economic downturn, will be unwilling to make major higher education spending increases in good economic times. What’s more, this provision ensures that, regardless of its fiscal condition, a state must continue to fund higher education even if it has to cut Medicaid for women and children, welfare or elementary and secondary education. States, who best understand the unique needs of their residents and have the nimbleness to act quickly to meet those needs, should be the ones to establish spending priorities, particularly during an economic decline — not the federal government.

 

Property Tax Deduction Limitation. The housing bill just passed by the Senate contains a provision that provides a new property tax deduction for individuals and joint filers who do not itemize their tax deductions. It is, however, only available to a resident of a state or locality that does not raise its tax rate between April 2, 2008, and January 1, 2009. This provision does not take into account that some localities may need to raise rates just to maintain police departments, fire services, schools and other public services. Again, local government leaders should be accountable to their citizens for these choices, not the federal government.

 

Intergovernmental impact

 

In both of these examples, Congress is attempting to remedy a problem. In the case of the higher education MOE, Congress recently has increased federal Pell Grants to make college more affordable and, thus, does not want states to counteract the benefit of this increase by reducing higher education expenditures. Similarly in the case of mortgage deductions to help homeowners, Congress does not want state and local governments to offset this benefit with higher property taxes. In both cases, Congress is taking a very parochial view, with little appreciation for the breadth of issues being faced by state and local governments.

 

The strength of our intergovernmental system is that state and local governments are smaller, more flexible and adaptable, and thus, as the Wall Street Journal indicated, “more fast.” Rather than appreciating that strength, the federal government is taking a very short-run, issue-specific approach that limits the flexibility of the entire intergovernmental system.

 

Unfortunately, with the current economic downturn, the federal deficit will increase dramatically over the next year, fueling an increasing willingness by Congress and the Administration to dictate federal priorities for state and local revenues. Because the increasing deficit will mean fewer funds for new federal discretionary programs, Congress is likely to consider more mandates that will continue to reduce state and local flexibility. Congress needs to step back from its short-run approach and understand that it is limiting those governments that are more capable of solving problems quickly.

 

 

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