By Request: State Budgets

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Sam Penrose asks:

Why do states have to balance their budgets every year?

One answer is “it’s not a very good idea.”

Another answer is that there’s no real reason and, in fact, they don’t really “have to” do it at all. As this primer from the National Conference of State Legislatures makes clear the nature of the balanced budget requirement varies from state-to-state in a number of respects, up to and including the fact that Vermont has no such legal requirement.

The practical issue is that no state has the capacity to issue the sort of routine, revolving debt instruments that are used to finance the federal deficit. I don’t think there’s anything actually stopping a state from trying to change its laws and build this capacity. I do suspect that if a state did try to move toward funding a structural deficit that people in other states might start to worry about what the broader consequences would be of Louisiana or Michigan defaulting on its debt and perhaps you’d see some kind of move to formalize the tradition of state balanced budgets.

But better than balanced budgets would, I think, be some kind of federal requirement for rainy day funds. States would, ideally, be made to sock away an amount of money equal to such-and-such a percentage of annual state expenditures. The funds would be “deposited” in some kind of federal account and then “released” by some kind of fiscal policy board that would also, obviously, have the authority to suspend the contribution requirement. I suppose there might be constitutional issues with this, though it’s not obvious to me that that’s the case.