NCPA - National Center for Policy Analysis


July 10, 2006

Most people know that the federal government is amassing large debts and unfunded liabilities.  But they may be unaware that state and local governments are doing the same, says Chris Edwards, director of tax policy at the Cato Institute.

With incentives like income tax exemption on state and local ("municipal") bond interest, governments have been borrowing in large numbers, but servicing the debt has left many in financial crisis:

  • Pension plans for state and local employees are underfunded by about $700 billion, according to Barclays Global Investors.
  • Health plans for employees are underfunded by about $1 trillion, according to Mercer Human Resources.
  • Overall, state and local debt jumped from $1.19 trillion in 2000 to $1.85 trillion by 2005, an increase of 55 percent, according to the Federal Reserve Board.

However, there are ways to alleviate the situation, says Edwards:

  • Congress should end the tax exemption for municipal debt in exchange for cutting overall tax rates on savings and investment.
  • States should use greater pay-as-you-go or current financing for needed infrastructure.
  • States should privatize things such as highways and airports that can support themselves by charging users.
  • States should cut employee retirement benefits and move toward pre-funded structures such as defined-contribution pensions and health savings accounts.

With debt rising at every level of government, says Edwards, tomorrow's families will have to fend off tax hikes on all three fronts: federal, state and local.

Source: Chris Edwards, "As Munis Mushroom, A Tax Toll Looms," Investor's Business Daily, July 8, 2006


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