According to Kenneth Adams of the Business Council of New York State, many of his members would love to expand in the state, but they can’t afford to, because the tax burden is too high on their businesses and their employees. East Coasters eagerly awaiting the opening of the next Wegmans supermarket in their area should perhaps give a silent thanks to New York State’s legislators; the hugely popular chain no longer seems to be opening stores in its home state, which now ranks dead last on the Tax Foundation’s annual State Business Tax Climate Index.
The situation is far from hopeless: as Barro notes, if the state closed just half the gap between its per capita Medicaid expenditures and the national average, it could lop $5 billion off its budget deficit. But that would mean a lot of unhappy Medicaid beneficiaries and health-care providers. Is Cuomo really willing to kill Grandma—or at least, the funding of Grandma’s home health-care aide?
In 1933, despite cuts, Arkansas could not stay solvent; it defaulted on $146 million worth of transportation bonds, a traumatic process that haunted the state for years. That was the last time a U.S. state defaulted on its bonds, but some economists are starting to worry again. “In California and New York,” says John Hood of the John Locke Foundation, “the fiscal crisis flirts with bankruptcy.”
According to Matt Fabian, a managing director at Municipal Market Advisors, “In the analyst community, there’s currently very little fear of default. It’s not like the industry is split—people who do municipal credit for a living just aren’t that worried.” Of course, very few mortgage-bond professionals expected house prices to collapse and drag the country down with them, and in both cases the experts’ logic is somewhat the same—it hasn’t happened since the Great Depression. But assuming Fabian is right that states won’t default on their debt, how will they get their financial affairs in order?
Raising taxes when the economy is still fragile would probably depress growth. Of course, so could cutting spending, because cuts would also throw thousands of state workers into a job market that already holds too few jobs. And cuts in benefits might end up being catastrophic for at least some beneficiaries.
But as McMahon notes, we’re not really talking about killing Grandma, or even abolishing Medicaid. We’re talking about holding spending to the levels that prevailed in, say, 2000, when I can personally attest that a lot of lively grandmothers were walking around the state.
There is no painless way to do this, especially with all the pressure about public-sector pensions that must be paid, but it needn’t be catastrophic. If politicians can muster the will, they can trim the state’s extremely generous Medicaid reimbursements, steer new state workers toward defined-contribution plans rather than traditional pensions, and pare back retiree health benefits (which are not necessarily subject to collective bargaining). And if states like New York can get themselves back on a fiscally sustainable path, they won’t just make the accountants happy; they’ll make themselves more attractive to residents and businesses that will help grow the tax base—and improve everyone’s standard of living.