Sometime in the next couple of months The Federal Government is going to give the state of California a lot of money. After lavishing more than a trillion dollars on Banks, Insurers and Auto Companies, there is a 0% probability that the government will sit back and let the largest state fail.
There real question is how do we go about propping up California. Whether we like it or not, California will set a precedent for the rest of the country. Believe it or not, California is not the only State struggling to keep its head above water. Congress and the administration need to have a strategy ready before Arnold comes crawling cap in hand to Washington.
Rather than putting together an ad-hoc plan for California, we should develop a national strategy for dealing with insolvent states. The plan that I am proposing is simple, non-intrusive and will ensure that Federal Government gets back every penny that it spends bailing out the states.
Federal loans should be made available to any state that chooses to accept them. In exchange, the state will be required to levy a 1% sales tax, whose revenue would be directed to the Federal government until the loan is repaid.
While, no one would enjoy paying the extra tax, it wouldn’t be nearly as devastating as the massive budget cuts currently facing states across the country. By securing a dedicated revenue stream, the loan would be risk free for the Federal Government. Furthermore, enacting a national policy would assure investors that state bonds were a safe investment, reducing borrowing costs for every state.
The greatest advantage of this plan would be in avoiding the political circus of negotiating a special bailout for every state in need. My plan would not solve the underlying problems facing California, but that is intentional. It is up to voters and politicians in California to find a long term solution to the state’s budget crises. Allowing Washington to interfere in the fine details of the State budget would be far worse.
Join the forum discussion on this post - (1) Posts
Related posts:
Blogs RSS feeds [
A budget crisis is a necessity for most states – it’s the only way to force legislators towards some semblance of rational spending.
CA’s problems is too many pigs at the trough, with too many inefficient programs that legislators are (so far) unwilling to cut. I’m all for working Americans earning a decent wage, but many of the public sector employees in CA are off the scale in terms of what they receive.
So far, nobody is willing to address this problem. This makes CA the GM of states. You can “save” it now by pumping in money, and you’ll just have to pump in money again next year. And the year after that.
If the “solution” to this situation is always higher taxes – because, believe me, any increase in sales tax will quickly be made permanent by CA’s spend-and-spend legislator – then the system will never have the pruning it so desperately needs.
No, in this case the sustainable solution might just be a bankruptcy. Just like GM. Tear up the CA Constitution and start over. Only then will we have a sustainable solution as opposed to the rolling-bailout.