Check Your Pockets

The New York Times this afternoon has a story about how New York State is taking financial control over Nassau County, the wealthiest county in New York and indeed, one of the 15 wealthiest in the country (2006-2008). All of this because the county couldn’t balance its budget and is carrying a $300 million shortfall.

There are some striking parallels to what’s going on in states and with the federal government. Nassau County owes at least some of its deficit to the local officials’ desire to roll back taxes in a time of economic hardship. Sounds quite similar to the revised federal deficit numbers out today that show a $400 billion increase — magically, the same amount as the price tag for December’s extension of the Bush-era tax cuts.

Of course, the big question is what to do? Cities can declare bankruptcy but states can’t. (There’s a move afoot in Congress to allow it, but I wouldn’t hold my breath.) Other states besides New York have the laws in place to take over local governments if they become financially unviable, so it’s conceivable that it could happen elsewhere. But then the state steps in, with all of its own financial drama, and…does what?

In many localities, the long-term neglect has led to a crisis so severe that some combination of hard service and staff cuts, salary and benefit reductions, and revenue increases will be necessary. All of these look pretty grim in a time of economic distress, but they look positively rosy when you compare it with the idea of states issuing IOUs to all of its creditors and employees.

In an era when economic disparity seems greater than ever (i.e., big companies are doing well with record earnings, middle- and low-income individuals are doing worse), there may be some room for … dare I say it? … wealth redistribution. Although the term has gotten evil connotations associated with it (everything from socialism to Marxism), any time we pay a tax or buy something, there’s some degree of redistribution. And taxes are a good place to start.

Our tax system (at both the federal level and in many states) has gotten less progressive over time. Why not reverse that trend? Add some high-dollar brackets back in, cut some high-end exemptions and income-sunset others. It’s easy to say, moderately easy to model, but ferociously difficult to implement. You think every little deduction has a constituency that defends it? Try focusing on the deductions that apply only to large corporations and wealthy individuals? If you listen closely, you can hear the $2000 Italian loafers skittering across the Capitol walkways in a lobbying frenzy.

So as our governmental institutions increasingly run into financial brick walls, keep an eye on your pockets. It may well be the Rest Of Us that pay the piper.