Democratic politicians are eying the newly limitless federal budget with the appetite of coronavirus-era shoppers swarming a new shipment of toilet paper.
“We’re in need. Where are you?” the mayor of New York City, Bill de Blasio, tweeted at President Trump on Sunday, asking Mr. Trump to press Senate Republicans to include money for cities and states in “this next stimulus package.”
The president of the Illinois State Senate, Don Harmon, is asking for $40 billion in federal aid, $10 billion of it to prop up the state’s pension system, the New York Times reports.
Mr. Trump and Senate Majority Leader McConnell may be tempted to respond to these entreaties the same way they do requests to restore the unlimited federal tax deduction for state and local taxes paid. That is, to tell the Democratic states to get lost. The federal government, at least the Republican-led parts of it, has zero desire to enable the Democrats’ bad habits.
There’s an alternative approach, though, that could be even more constructive. Messrs. Trump and McConnell could use their newfound financial leverage to demand policy reforms that would diminish the long-term structural dysfunctionality of these states.
There’s plenty of precedent for federal funding having strings attached. Federal education aid and defense contract dollars come with civil rights nondiscrimination provisions. In the Obama administration, Democrats put conditions on expanded Medicaid funding. President George W. Bush teamed up with Senator Edward Kennedy to make expanded federal education funding conditional on increased accountability, testing, and transparency. One might argue about the merits of any particular set of conditions, but the point is, there were conditions.
If the federal historical precedents are insufficient, Mr. Trump might compare the situation to a corporate debt restructuring or workout. A bank or non-bank lender coming into a situation with a distressed borrower has a lot of power to demand change. The business can avoid liquidation and management may be even be able to retain control — but there may have to be executive pay cuts or asset sales, and the late money is going to want some board seats going forward.
Rather than ask Democrats to sign on to an entire prix fixe program of reforms, Mr. Trump, or Congress, could set it up more like an a la carte menu aimed at encouraging states to create efficiency and modernize. Maybe each five percentage points a state cuts its top marginal state and local income tax rate brings an additional $5 billion in federal aid.
Maybe not a cent of federal dollars goes to a federal bailout of a state pension fund unless that state moves new workers out of defined benefit plans and into defined contribution plans of the sort that are now standard in the private sector. Maybe the federal funding comes as a match to the amount that states and their local governments reduce the pension benefits of their existing retirees who are earning more than $100,000 a year.
A 2019 New York Post editorial, “Pensions New York Taxpayers Can’t Afford,” with data from the Empire Center named a retired lawyer for the city’s department of housing preservation and development who qualified for a $434,263 city pension, and three other city retirees earning pensions of more than $300,000 a year. One New York City police officer was collecting a $474,511 a year pension. Illinois is no better.
“This is infuriating. We can’t bailout Illinois’s notoriously corrupt and mismanaged pension system,” is the way the former governor of South Carolina, Nikki Haley, put it.
Maybe federal bailout dollars don’t flow to any state-run transit or health system in which the employees are so highly paid that they earn more than the average private-sector worker performing a similar function in that state, taking health care and pension benefits into account. Maybe the bailout funds are tied to states and cities agreeing to privatize some of these services by putting them up for sale or long-term lease.
Messrs. Trump and McConnell could ask governors and mayors seeking bailout money to allow natural gas pipelines, hydraulic fracturing, and offshore drilling rather than banning it.
For the details on potential efficiencies — and current excesses and inefficiencies — the Senate might invite to testify E.J. McMahon of the Empire Center for Public Policy, and a representative of the Citizens Budget Commission. For the Illinois piece, invite Richard Porter, a Chicago lawyer who had a recent article up at RealClearPolitics about the need to reform excessive pensions in that state.
The particulars are important, but they are less important than the principle. The principle is that if Governors Cuomo and Pritzker and Newsom and their ilk have an unlimited, undated, blank check from Washington, they have much less incentive to curb their tax-and-spend, big-government ways.
Our federal system means that states have a lot of discretion. Some states, like New York, Illinois, and California, may prefer high taxes to support more social services and a highly paid unionized workforce of civil-service employees and retirees. Other states, like Texas, Florida, New Hampshire, or Nevada, may take a more libertarian approach, with no state income tax and more efficient service delivery.
Ironically, many of the retired government workers from the high-tax states choose to take their pensions and move to the more Republican-leaning lower tax states. In 2017, New York City alone paid $1.3 billion in pension benefits to 35,410 Florida residents. This all “works” so long as it is New York and California voters choosing to impose higher taxes on themselves.
When the taxes fall steeply on a smaller and smaller group of high earners, it starts to look more like taxation without representation. Wealthy taxpayers (Carl Icahn, Paul Tudor Jones, Leon Cooperman, David Tepper, Tom Brady) are increasingly saying no thanks, choosing to leave higher-tax states in the North and move to Florida instead.
When New York and Illinois start asking Washington for a bailout, what they are really doing is asking taxpayers who live in better-managed states to pay their bills. If Mayor de Blasio or Governor Cuomo and their blue state colleagues want Florida billionaires to pay for New York’s gold-plated contracts with public employee unions and what remains of the Lindsay-Rockefeller-style welfare state, the politicians could try to clean up New York’s act so that the billionaires want to move back.
Instead, though, Messrs. de Blasio, Cuomo, and Pritzker seem to want Messrs. Trump and McConnell to stick the entire country with the bill for the profligacy of New York and Illinois. In that case, if Mr. Trump doesn’t get some serious structural reform in exchange for all those tens of billions, it’s time for the President to cancel tomorrow’s coronavirus briefing and instead hole up and re-read “The Art of the Deal.”
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