June 23, 2008

Zipcar Popularity Leads to Taxation Dilemma

What is the difference between a rental car company and a car-sharing company? That’s the question public officials and tax lawyers around the country are trying to figure out as states and cities begin to apply rental car taxes formerly applied only to companies like Alamo and Hertz onto car-sharing companies like Zipcar (formerly Flexcar). Zipcar is a national for-profit while most original car-sharing organizations were non-profit and locally based.

An article in The Wall Street Journal last Thursday details the increasing prices associated with borrowing a car for a few hours. In many cities, the cost of a 2 hour car-sharing trip has gone up between $2 and $4.

If no exemptions are granted, the fees can add up such that Zipcar loses its cost-advantage. In Philadelphia, Zipcar members must pay a 2% state rental-car tax, plus a $2-per-rental state tax, and the city's 2% rental-car tax every time they reserve a car.

This would seem to make it more difficult for the kind of low-income urban dweller who would like to be able to get around without owning a car (and avoid the associated costs of insurance, gasoline, and parking) to be able to do so. Taxes applied to each car reservation are far more onerous to Zipcar users who tend to use the cars more often than Enterprise renters, for example, rent cars. On the other hand, many rental car companies such as Hertz have begun offering hourly rates for car rentals, essentially the equivalent service of a car share company.

Public policies should be encouraging a reduction in car ownership whenever possible. There are many positive externalities associated with fewer cars on the roads including a reduction in air pollutants, less traffic congestion, and a reduced reliance on foreign oil imports. But are there specific externalities associated with joining a car-sharing service per se?

Zipcar spokesperson John Williams believes so:

"Fundamentally, we believe that car sharing is different from car rental," he said. "The question isn't so much about percentage rates as it is a question about smart policy."

Mr. Williams said that after people join car-sharing programs, "there is a behavior shift" -- they drive 40 percent fewer miles, and eventually many of them…sell their cars.

Zipcar claims that each car-sharing vehicle added to the streets removes approximately 15 privately owned cars off the streets. It also says that about 40% of its members would own a car or second vehicle if it weren’t for Zipcar. About 2 million people participate in car-sharing around the country.

That seems to imply that some particular benefit is derived from having cars placed strategically around urban areas so that most people have access to them without needing a car to get there in the first place.

There’s also added flexibility to the Zipcar program that you cannot necessarily get with rental car companies. New Jersey Transit recently partnered with Zipcar, and it allows you to reserve a Zipcar to bridge the gap between where trains can take you and where you need to go. In other words, if you live far from a train station, you can reserve a Zipcar at the train station so you can make it to all the way home.

Nearly 100 different rental-taxes have been enacted nationwide and have cost consumers more than $6 billion since 1990. Opponents claim the tax money goes to fund projects that those burdened by the tax derive no benefit from. The popularity of car-rental taxes comes from the theory that they mostly tax visitors to a given city or state, not the voters living there. However, as car-rental taxes are applied to local residents using car-sharing programs, they are no longer quite as politically palatable. Legislation was introduced last year at the federal level banning the implementation of new rental-taxes while leaving the current ones in place. It aims to rectify the unfairness of targeting a particular industry for taxation.

At the end of the day, tax treatment of car-renting vs. car-sharing businesses will likely depend on what exact services are being offered and whether they deserve special treatment in light of their environmental benefits. Localities might consider developing rental-tax exemptions depending on usage. For example, in Chicago the tax applies to daily rentals but not hourly rentals. Bostonian Zipcar users are charged a flat annual “convention center tax” but not taxed each time they reserve a Zipcar.

While Chicago’s system should prevent having to explicitly discriminate between “car-sharing” and “car-rental” companies for tax purposes, it won’t eliminate the potential to game the system. For example, business travelers might be able to take advantage of the hourly rate to complete their business in a rental car without paying the rental-tax. This tax relief wouldn’t be directed at those who need incentives not to own a car. Similarly, those who may legitimately need this tax relief will be penalized for day-rentals if they have errands that take longer than a few hours to complete.

Ultimately, any remedies for the current situation are bound to have imperfections. However, hourly rental tax exemptions are likely to ensure maximum tax-fairness and maximum positive externalities for the rental car and car sharing industries.

June 22, 2008

Nevada: Special Session Postponed (Sort Of)

In the wake of news that Nevada's projected budget deficit will be larger than previously estimated, Governor Jim Gibbons has postponed the start of his special legislative session on the budget deficit from next Monday to Friday. The news isn't good:
[T]he new shortfall figure lawmakers must deal with when they convene on Friday is $250 million, more than a $243 million shortfall projected by state Budget Director Andrew Clinger. And far above the $94 million projected by legislative fiscal analysts.
A Gibbons representative made it clear that with the expanded deficit, all policy options were on the table-- except for half of them:
Josh Hicks, general counsel to Gibbons, said every type of potential budget cut is on the table for the session, from 4 percent cost-of-living raises set to take effect July 1 for state employees and public teachers, to cuts to programs. Tax increases, he said, "are not on the governor's table."
Of course, when you've already identified $900 million of spending cuts without a single tax hike, what's another $250 million? The Governor's single-minded approach to resolving the state's fiscal crisis reminds me of this exchange from the John Belushi-Dan Ackroyd classic "The Blues Brothers":
Elwood: What kind of music do you usually have here?
Claire: Oh, we got both kinds. We got country and western.

June 20, 2008

Virginia: Gilmore Allies Jumping Ship

In his tenure as governor of Virginia in the late 1990s, Jim Gilmore was notable primarily for one thing: the cut in the state's "car tax" he championed. It got him elected, and it was the issue he rode throughout his governorship. And lawmakers in other states took note: cutting vehicle property taxes has been a frequent bipartisan goal of state lawmakers for the last decade now.

But, as countless Virginia observers (and a bunch of angry lawmakers) have noted since then, supporters of the Gilmore car tax cut were sold a bill of goods. It turned out almost immediately that repealing the car tax was unaffordable, since the short-term surpluses that made the tax cut seem feasible were, well, short-term. And Gilmore's tax cut has been a political football in the state's budgeting process ever since.

Now, Gilmore has decided to make another run at statewide office, and is running against Mark Warner for the US Senate seat being vacated by John Warner. And he's finding out what happens when a snake-oil salesman tries to fool the same people twice: it doesn't work.

The Washington Post reports this week that Vincent Callahan, a Republican lawmaker who was instrumental in the initial passage of Gilmore's car tax cut, is endorsing Gilmore's Democratic opponent, Warner, in this fall's race. The reason, according to Callahan: Gilmore's misleading advocacy of the car tax cut last time around.
Callahan said Gilmore, Warner's GOP opponent, misled legislators and the public about the state's finances and the cost of his signature effort to eliminate the car tax when he was governor from 1998 to 2002. 'The figures Gilmore used were so utterly erroneous and far-fetched that they were mind-boggling,' said Callahan.
Of course, revenue forecasting is often more of an art than a science. But in retrospect, there's little disagreement (from anyone except Gilmore himself, that is) that Gilmore lowballed the cost and the affordability of his car tax cut .

A Washington Post editorial noting Gilmore's razor-thin primary win over a relative nobody for the GOP nomination offers a scathing review of Gilmore's fiscal policy record:
At the heart of the Gilmore legacy was his insistence on ramming through a tax cut whose dimensions dwarfed his cavalier initial estimates, and his simultaneous approval of heavy increases in state spending, a strategy -- if it can be called that -- suggesting that Mr. Gilmore assumed that the boom times in Virginia would never end. He pursued his signature tax cut, a phased repeal of the levy on personal vehicles, even after it became crystal clear that the repeal would drain hundreds of millions of dollars from the budget and cripple state finances. He insisted on his course despite being warned -- by fellow Republicans, among others -- that it would eventually force deep reductions in spending on core state priorities including transportation and education. And he shrugged off specific, repeated and well grounded forecasts that Virginia was heading for an economic slowdown brought on by the bursting of the technology and stock market bubble -- a slump Mr. Gilmore simply denied.
In Mr. Gilmore, Virginia had its very own Herbert Hoover. "State government is in sound financial shape," he declared sunnily in August 2001, even as state lawmakers from both parties predicted a $500 million revenue shortfall in the commonwealth's $25 billion budget -- about 10 times Mr. Gilmore's own projections and, as it turned out, itself an underestimation of the state's actual woes. Mr. Gilmore's allies
sometimes argue that no one could have foreseen the economic effects of the Sept. 11 attacks, which occurred four months before he left office. True enough, but also irrelevant: The problem had swollen to major proportions well before the attacks, and Mr. Gilmore ignored it.
He did so in part by budgetary gimmickry and sleight of hand of the sort seldom seen in Virginia, with its stodgy custom of fiscal prudence. When it became plain that the state's revenue growth had hit a wall, a condition that Mr. Gilmore himself had said would preclude a further rollback of the car tax, he proposed a novel solution: conjuring revenue by borrowing against a one-time legal settlement with tobacco companies. That scheme, which encapsulated Mr. Gilmore's poor judgment and fondness for budgetary trickery, elicited groans from Republican and Democratic lawmakers alike.
Today, Mr. Gilmore innocently states that on leaving office in 2002 he bequeathed a balanced budget and $1 billion in reserves. But the balanced budget was a fiction that papered over a yawning deficit with shenanigans such as requiring retailers to prepay their sales tax and employers to prepay their withholding tax. And the reserves, for which Mr. Gilmore bears no responsibility -- they were statutorily required -- did nothing to forestall the state's fiscal crisis. It fell to Mr. Warner, who succeeded Mr. Gilmore as governor, to fix what quickly mushroomed to a nearly $4 billion problem.

President Bush Supports a Tax Hike

And you thought the day would never come: earlier this week, President Bush signed into law a bill that (gasp) increases federal taxes. The bill, HR 6081, known as the "Heroes Earnings Assistance and Relief Tax Act," creates or extends a host of special tax breaks for military members and their families, which in itself is a move no sane member of Congress would oppose. But heretically, the bill pays for its tax cuts by closing an existing tax loophole.

The tax break in question, which Talking Taxes discussed in detail a few months back, allowed KBR, a former subsidiary of the Halliburton company, to avoid hundreds of millions of dollars in federal Social Security and Medicare taxes by pretending its Iraq-based employees were working for a Cayman-Islands based "shell company."

Just as tax breaks for the military have no enemies (the House voted unanimously on this one), the KBR payroll tax dodge had no friends. So for any head of state not guided by the "no new taxes" mantra, signing this bill would be a no-brainer. But in this case, we'll call it a pleasant surprise.

Now, as the NWLC's Joan Entmacher asks, why can't we get Congress and the President to apply the same logic to the egregious "carried interest" tax break for hedge fund millionaires?

June 19, 2008

Nevada: Tax Hikes in Special Session Possible

The Reno Gazette Journal reports that tax increases may be on the agenda for next week's special session of the Nevada legislature. Among the candidates, according to Assemblywoman Sheila Leslie, D-Reno, is raising the business payroll tax and hiking the hotel tax, popularly known as the "room tax."

For those who've followed Governor Jim Gibbons' membership in the dwindling crowd of state executives who are adhering to "no new taxes" pledges, this isn't terribly exciting news because the harsh political realities of the state suggest it doesn't matter what tax hikes the legislature discusses:
Gov. Jim Gibbons has said he would stick to his election-campaign pledge of no new taxes. Democrats are a vote shy of being able to override a veto in the Assembly and are in the minority in the Senate. Lanni’s suggestion to raise the payroll tax from 0.63 percent to 1.23 percent and generate $246 million annually won’t go far in the special session, Senate Majority Leader Bill Raggio, R-Reno, said.“I am aware of it and have also heard from him on that and my indication is that this is not the time to start talking about raising taxes,” Raggio said. “We are in tough times and businesses are hurting and in this special session, it is something that we can’t even consider.”
Of course, depending on the outcome of the ongoing brouhaha over the size of Nevada's budget deficit, Democrats may ultimately find it easier to override a gubernatorial veto. And it's always possible that Governor Gibbons will back away from his pledge and start evaluating the state's fiscal jam in a non-judgmental way.

But don't hold your breath.

Alabama case contests discriminatory property tax restrictions

In a court case filed earlier this year in Alabama, lawyers for several rural schoolchildren and their parents hope to demonstrate that Alabama’s regressive tax code unconstitutionally disadvantages children in poor, rural counties by limiting the ability of localities to raise a reasonable amount of revenue with which to fund education. The plaintiffs’ approach in this case involves a thorough accounting of the history of Alabama’s property tax, with the intent of demonstrating that these policies were purposely enacted to destroy the ability of counties to pay for African Americans’ educations with money raised from wealthier white landholders. If this approach proves itself effective, the requested remedy is a mandate requiring the governor and legislature to work together to rewrite Alabama’s property tax law in such a way as to make it non-discriminatory.

Though there may be reason to question the use of the courts in securing tax policy reform, what is interesting about this case is the way it demonstrates the unsavory original intent behind many of Alabama’s property tax limitations. The district court hearing the case conceded as much in an earlier case when it stated that “constitutional provisions governing the taxation of property [in Alabama] are traceable to, rooted in, and have their antecedents in an original segregative, discriminatory policy”.

According to the plaintiffs’ official complaint, following Reconstruction, Alabama’s white elites exploited widespread racial resentments in order to gain enactment of their favored regressive tax policies. In the post Civil War period, the tax base, which had been focused on the slave trade, was redirected onto land. But when blacks were enfranchised, wealthy whites who owned significant tracts of land in the “Black Belt” feared that if blacks were granted local autonomy, they would vote to raise property taxes (which would hit hardest those well-off enough to afford significant amounts of property) in order to support their own education. Though the idea of funding public services for the poor with money drawn from more fortunate members of society is hardly controversial today, at the time the prospect of privileged whites having to pay for the education of “inferior” African Americans was extremely unsettling. Limiting the amount of tax that could be levied on property thus became a top priority.

One of the earliest manifestations of this sentiment can be founded in the 1875 Redeemer Constitution. Caps on the rate of property taxation were implemented, largely in order to protect wealthier whites from tax increases in predominately black localities. At the time, and for some years after, manipulative assessment schemes served a similar end.

Later, in 1891, the Apportionment Act explicitly allowed for funds to be transferred from black to white schools. This removed any impetus for whites to increase property taxes to fund their own schools, and made property tax caps even more useful.

Subsequent to these policies came the adoption of the 1901 Alabama State Constitution, still in effect today, which the plaintiffs claim was created with the explicit goal of “disenfranchising blacks and maintaining white supremacy” in the state. That claim seems relatively uncontroversial, as the Constitution established a poll tax, as well as literacy and landowning requirements for voting that kept African Americans effectively disenfranchised and segregated from the rest of society until the 1960s. With blacks disenfranchised, the constitution also established a referendum requirement for all local property tax changes.

In addition to the disenfranchisement of blacks was a solidifying of state-level control of local tax issues. The plaintiffs describe state intervention into local property tax policy as an important “fall-back provision for guaranteeing the maintenance of white supremacy in black majority counties”. Unlike some county governments, the state was certain to maintain a white majority of legislators.

Although discriminatory voter laws, segregation, and inconsistent property assessments were eventually struck down in court in the 60s and 70s, the crippling effects of other Alabama tax laws contained in the state constitution continue to this day. In response to a federal district court ruling that struck down the irrational assessment system that had been used in Alabama for decades, the Alabama legislature passed a “Lid Bill” amendment that was ratified by voters in 1972. The amendment (Amendment 325) established fair market value assessment ratios for all kinds of property (30% for utilities, 25% for other business property, and 15% to residential, farm, and forest lands) and imposed an absolute lid on all ad valorem taxes of 1.5% of fair market value. To see why “split roll” property taxes of this type are a poorly targeted way to shift the tax burden from residents to businesses, see this policy brief from the Institute on Taxation and Economic Policy (ITEP).

A second Lid Bill in 1978 lowered the property assessment ratio to 10% for residential, agricultural, and forest land and measured value not as “fair market value” but rather on the land’s “current use.” Requiring land to be taxed on the value of its current use results in a huge tax break for wealthy landowners and speculators. As the court brief explains, “Seventy percent of Alabama’s land mass is forest land, but due to the 10% assessment ratio and current use provisions of the 1971 and 1978 Lid Bill Amendments, forest land contributes only 2% of all property tax revenue.”

To add yet another layer of unfairness, the Lid Laws revoke local autonomy by requiring a lengthy three stage process if a locality wishes to raise property taxes. First, the locality's commission or council must vote to request that the legislature pass a local constitutional amendment that would raise the locality's property taxes. Then the state legislature must approve the constitutional amendment, with at least 60 percent of both chambers voting in favor. Finally, a majority of the locality's voters must approve the amendment in a referendum. As the icing on the cake, if any member of the Legislature objects to the amendment, then it is sent to a statewide vote (and thus, most people voting on it will not even be subject to the locality’s property taxes). These extremely cumbersome requirements not only undermine local control but also impede the state legislature from promptly dealing with more important state business.

Unlike the debates that had taken place in the late 1800s and early 1900s, the discussion of whether to enact the 1970s Lid Laws was much less openly racist. But with George Wallace, a famous segregationist, in the office of the governor, race was certainly a visible issue. Given the history of Alabama tax policy, it’s not at all surprising that the plaintiffs conclude that,

There is an historical pattern of the racial motives behind the property tax provisions in the Alabama Constitution: There is a direct line of continuity between the property tax provisions of the 1875 Constitution, the 1901 Constitution, and the amendments up to 1978.

But aside from the existence of racial biases in the intent of Alabama tax law, what is more useful to point out is the existence of anti-poor (and as a corollary, anti-black) biases in the effect of the law.

The confluence of anti-tax provisions in effect in Alabama makes obtaining sufficient revenues from property taxes nearly impossible. Alabama property taxes are the lowest in the nation as a share of personal income. According to the court brief, in 2003, Alabama spent $5,908 per K-12 student, compared with a national average of $7,376 per student, making it the fourth lowest ranked state. The correlation between property taxes and school spending is no coincidence and it has serious negative consequences for Alabama schools, and in turn for the state’s long-term economic growth. Many school buildings are old and crumbling, and some are so overcrowded they have been forced to use trailers for overflow classrooms. Alabama is among the bottom ten states in writing scores with 76% of 8th graders writing below grade-level.

But a look only at property taxes and school funding does not provide a view of the full picture. Simply put: low property taxes are not the same thing as low taxes overall. Due largely to unusually high sales taxes and an almost-flat income tax, lower- and middle-income Alabamians actually end up paying a very significant amount of their income in state and local taxes. According to ITEP data, the poorest 20% of Alabama residents (earning less than $16,000 a year) pay about 11.2% of their income in state and local taxes under 2008 tax law. That’s well over two times the percentage paid by the richest 1 percent, or those with average incomes of more than $999,400.

A large contributor to this outcome is the entrenched preference for sales taxes in Alabama’s tax code. Sales taxes are exempted from the referenda requirements in place for raising property taxes, so many localities rely on these to fund schools. Sales taxes run as high as 11% in some parts of Alabama and according to ITEP estimates, the bottom 80% of taxpayers pay over five times as much in sales taxes as they do in property taxes. Sales taxes are also notoriously vulnerable to economic slowdowns. Making matters worse for Alabama’s sales tax is that it is littered with numerous needless exemptions for various goods and services (each of which contribute to the need for such high sales tax rates in the state) while groceries continue to be subject to the tax. Grocery taxes hit the poor the hardest since such a large portion of a poorer family’s income goes to paying for groceries. Alabama is one of only two states where sales tax is fully applied to groceries.

Alabama also has a seriously flawed income tax code. Up through 2005, Alabama required a family of 4 to start paying income taxes on $4,600 of income. This threshold was raised to $12,600 in 2006, but it’s still the fourth lowest in the nation (and a family of four is considered poor if they made less than $19,961 in 2005). Its higher tax brackets kick in at such low income levels (Almost 70% of Alabama taxpayers paid at the top rate in 2006) that the wealthiest 20% of Alabamians actually manage to pay out less of their income in income taxes than the middle 20%. This is in large part because Alabama is one of only seven states that allow a full deduction from state income taxes of federal income taxes paid. Since the wealthy pay much more federal income taxes than the poor and middle class, this sharply reduces the effective tax burden of the state income tax on the wealthy.

How can this be changed? Much of the problem lies with Alabama’s constitution, which has kept Alabama’s tax code among the most regressive in the nation. (Incidentally, the 1901 constitution was only ratified by rigging the vote in Alabama’s Black Belt – the referendum actually lost outside the Black Belt where there was no vote rigging). Entrenching tax policy in the state constitution is never a good idea as it makes it far too difficult to adjust the law to confront new challenges. A movement away from this process would be a great first step.

The legacy of tax unfairness is inexorably linked to the legacy of racial injustice in Alabama. The intentional racial bias in Alabama’s tax system may be less visible today, but effects on low-income Alabamians are still very plain. Aside from all the legal and historical arguments raised by this court case, one thing is clear: the solution proposed by the plaintiffs – that the Governor and legislature work to enact serious reforms to Alabama’s tax system – is absolutely necessary. Alabama property taxes are the lowest in the country and K-12 and higher education have both noticeably suffered as a result. High sales taxes and an essentially flat income tax exacerbate this imbalance. It’s time for Alabama to break away from its humiliating past and enact a tax system designed with 21st century considerations in mind.

June 13, 2008

Connecticut Gas Taxes: Playing Politics with a Serious Crisis

The Connecticut House and Senate each approved a bill early Thursday morning that adds to the state’s existing $150 million deficit by cancelling a scheduled increase in the state’s tax on wholesale earnings from gasoline sales. Governor Rell is expected to sign the measure. The bill prevents what would have been a 0.5% increase in the petroleum wholesale earnings tax, which industry lobbyists are claiming would have increased prices at the pump by about 5 cents.

The estimated cost of this bill has been pegged at $25 million. It may at first seem odd that Connecticut lawmakers have decided to make cutting taxes a top priority when the state is facing a budget deficit and numerous counties have been forced to scale back vital public services whose benefits almost certainly outweigh their costs. Even in the face of these serious budgetary issues, one of the first reactions from Democratic House Speaker James A. Amann was that “We didn’t raise taxes, so we’re pretty proud of what we’ve done.”

What’s going on here? Why is restricting revenues such a priority when it couldn’t be more obvious that state and local governments need more funds to provide the services Connecticut families have come to expect?

The answer: It’s an election year! Republican legislators, outnumbered 44 to 107 in the House and 13 to 23 in the Senate, have opted for a strategy of supporting viscerally appealing, though often fiscally irresponsible plans designed to gain some positive publicity and win votes in November. The majority of those plans have been ignored by the Democrats in power (for the most part with good reason), though with gas prices as high as they are, the Democrats decided not to take the political risk associated with appearing uninterested in the effects of high fuel costs on Connecticut families.

This isn’t at all surprising. Many state lawmakers across the nation have latched on to the headlines being generated by high fuel prices by proposing gas tax reductions much better suited for winning votes than for actually helping anybody in need. This plan in Connecticut is no different.

Even if we put aside our skepticism of the petroleum industry’s figures and accept their estimate that this bill will prevent a 5 cent increase in the price of gas, few observers could seriously suggest that avoiding this increase will do anything to improve the financial situation of Connecticut families. During the brief debate that occurred earlier this year over a proposed suspension of the 18.4 cent federal gas tax, that plan was heavily criticized for only providing the average driver with a $30 tax cut. The Connecticut bill would save drivers less than a third of that amount, though it would play a noticeable role in driving the state government millions deeper into debt.

Well aware that this bill would only provide a negligible tax cut for the average family, one legislator insisted, in typical election-year fashion, that it is important to “let our citizens know that we are very concerned about what they’re up against”.

That’s what makes this whole debate so discouraging. The problem is not just that Connecticut lawmakers are shamelessly hunting for votes – it’s that in the face of a serious crisis for lower-income families, lawmakers have decided that “letting our citizens know we’re concerned” is more important than actually doing something meaningful to help them.

Even if Connecticut legislators wished to avoid a needed restructuring of their state’s regressive tax system, this does not change the fact that much better options exist for providing real assistance to families hurt by high fuel costs. Instead of offering across-the-board tax relief that benefits both Connecticut’s wealthiest, as well as its poorest families, a targeted low-income gas tax credit of the type enacted in Minnesota could have distributed more gas tax relief to lower-income families at a similar cost. Alternatively, Connecticut could have given consideration to enacting a modest Earned Income Tax Credit (EITC) or a meaningful low-income, refundable property tax circuit-breaker. Admittedly, an EITC or circuit-breaker would cost more than a gas tax cut or gas tax credit, but if legislators are genuinely “concerned”, wouldn’t it be worth it to find the money somehow? Until legislators readjust their priorities from winning votes to improving the lives of those struggling to make ends meet, Americans shouldn’t expect any relief beyond the kind of poorly targeted and gimmicky tax cut passed in Connecticut.

June 01, 2008

Economic Stimulus RX: More State Spending

With new Commerce Department data confirming that the US economy is growing at a level well below historical averages, policymakers are asking what else they can possibly do to jump-start the nation's economic engine. In today's New York Times, Louis Uchitelle points out that Congress has, so far, ignored one important tool in our collective economic toolbox: "chanel[ling] extra federal money to city and state governments so they can sustain their outlays for the numerous programs that otherwise would be shrunk."

This argument is pretty basic-- if states have to pare back their budgets, they'll cut spending on education and transportation and will reduce state employment in these areas, so giving states emergency fiscal relief will allow states to keep these jobs-- but it isn't new. As Uchitelle points out, Keynesians have long argued that government spending can be an effective option for digging out of economic downturns. And this position has had an eloquent advocate already this year in Columbia University's Joseph Stiglitz, who argued back in January that the best federal "stimulus" plan would include:
giving money to states and localities that are facing real financial constraints. Tax revenues are going down. Property values are going down. And most states have a balanced budget framework.
So if the revenues go down, they have to cut their expenditures. And this will depress the economy. So dollar for dollar, this will stimulate the economy enormously.
The common-sense point being made by both Uchitelle and Stiglitz is that government spending, just like private spending, boosts our economy. It's a point that is too often forgotten by policymakers who (whether they realize it or not) are still in thrall to the Reaganite notion that nothing good ever came out of government. Folks in Congress who ought to know better have been falling all over themselves this year to put "extra" money in the hands of individual consumers, with the hope that they will spend it and thereby boost the economy, but have given little thought to the idea that state governments can provide a similar stimulus of their own.

There's some hope from the ongoing presidential debate, according to Uchitelle, in that at least one party's candidates are singing the Keynesian tune (if slightly off key):
The Republicans in particular are less than enthusiastic about Keynesian economics, with its use of government to rescue markets. They, and many mainstream economists, for that matter, argue that government is inefficient, bureaucratic, wasteful and unable to spend fast enough to counteract a downturn. The two Democratic candidates, in contrast, argue that a second stimulus package, if one is needed, should include federal subsidies to the states and municipalities, not to start new projects but to prevent cutbacks in existing ones.
But this idea certainly isn't a central plank of either Democratic candidate's platform. And even abstracting from these political difficulties, there's a basic policy problem that makes the Uchitelle/Stiglitz solution a hard sell: what Uchitelle breezily refers to as "extra federal money" is in pretty short supply right now. Until someone at the federal level can stomach the notion of admitting that federal taxes are simply too low to meet our needs, any federal grants to state governments will essentially be paid for by borrowing money from our creditors overseas. The federal government can absolutely come to the aid of states through a new regime of stimulative grants-- but the positive long-term impact will be less clear if this federal spending is paid for by our grandchildren.