Federalism in Action

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The greatly imperiled traditional view of federalism has it that among the other mechanisms for the balancing (and hence constraining) of powers in our government, the states require substantial power to balance that of the federal government.

One of the benefits of federalism is that it allows the various states to experiment. If Texas wants to try fiscal discipline while California engages in fiscal incontinence, the rest of the states can watch and judge which fiscal policy is most productive of wealth and happiness for citizens generally.

We see this happening now before our very eyes, as most of the states grapple with budget deficits. Different states are pursuing different policies.

We see, for example, Illinois jamming through a two-thirds hike in personal income taxes and a nearly 50% rise in state corporate taxes to deal with its budget deficit. But in Georgia, a bipartisan tax commission has recommended to the state legislature that it cut its personal and corporate tax rates from the present 6% down to only 4%. As one of the commission members — economist Christine Ries of Georgia Tech — put it, “Our over-riding goal was to get the income tax rate down as low as possible, because the evidence is so clear that this is the biggest driver of growth and jobs.” The commission proposes to cover the tax loss by expanding the application of Georgia’s 4% sales tax to many purchases (such as groceries) now exempt from it.

Shifting corporate and personal income tax to consumption tax seems like an economic no-brainer if you want to encourage the creation of jobs, although as the Wall Street Journal notes,the logical thing would be for Georgia to eliminate the income tax altogether (as nearby Florida and Texas have done).

Again, it is nice to be able to contrast the behavior of, say, California with Utah. Newly-installed California Jerry Brown, the aging Moonbeam whose original decision (1978) to let public employees unionize and collectively bargain was a major reason for the state’s massive overspending today, and who owes his election to massive spending by those same unions, has proposed a plan to deal with the state’s budget deficit. It calls for dramatic increases in taxes and some cuts in spending, but does nothing to address the ridiculously bloated salaries and pensions that state employees receive. He intends to use the prospect of cuts in services to cow the citizens into raising taxes.

This is the typical statist ploy: threaten cuts in public service to get what you really want, which is always more taxes, while leaving the underlying problem (ballooning compensation and pensions for government workers) untouched. At least the miserable Governor Schwarzenegger tried, at the beginning of his regime, to address the public employee pension problem, by floating an initiative that would have put all new hires on defined contribution plans (such as 401k), before being whipped into a girly-liberal by the public employee unions.

Illinois is another case of the statist response to the pension crisis. Governor Pat Quinn, just a month before the November election and in the face of a huge state budget deficit, gave the public employee unions a guaranteed two years of no layoffs and even cost of living increases. With their support he squeaked through to reelection. After winning, he jammed through massive tax increases.

Now, Utah has taken a different tack. The state pension plan was fully funded back in 2007, but suddenly, by 2009, it fell to only 70% funded, meaning that the state faced a pension funding gap of $6.5 billion. This gap was one and a half times the debt allowed by the state constitution. But the constitution makes changing the pension plans of current workers virtually impossible.

So the Utah legislature made a reasonable choice, under the circumstances. It set up a defined contribution plan for all hires, starting this year, the state donating a generous 10% of the employee’s salary. The plan allows employees a defined benefit option — but again, the state’s contribution is capped at 10%.

For workers, the nice thing about the plan is that they have a fully portable plan, and one whose assets they own personally, so they can’t be “borrowed” by government and used to buy votes in the way that Social Security funds are, or appropriated by a union and used to buy politicians.

The nice thing for taxpayers is that this plan will eventually cost them only about half what the old system would. It shields them from having to cover the costs of any future stock market declines.

Legislatures in Montana and a dozen other states are looking at this model.

That, dear reader, is truly federalism in action.




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