Governors see debt bombs in stimulus

Opinion Journal:

Debt-laden state governments were supposed to be the big winners from the $787 billion economic stimulus bill. But at least five Republican Governors are saying thanks but no thanks to some of the $150 billion of "free" money doled out to states, because it could make their budget headaches much worse down the line. And they're right.

These Governors -- Haley Barbour of Mississippi, Bobby Jindal of Louisiana, Butch Otter of Idaho, Rick Perry of Texas and Mark Sanford of South Carolina -- all have the same objection: The tens of billions of dollars of aid for health care, welfare and education will disappear in two years and leave states with no way to finance the expanded programs. Mr. Perry sent a letter to President Obama last week warning that Texas may refuse certain stimulus funds. "If this money expands entitlements, we will not accept it. This is exactly how addicts get hooked on drugs," he says.

Consider South Carolina. Its annual budget is roughly $7 billion and the stimulus will send about $2.8 billion to the state over two years. But to spend the hundreds of millions of dollars allocated to the likes of Head Start, child care subsidies and special education, the state will have to enroll thousands of new families into the programs. "There's no way politically we're going to be able to push people out of the program in two years when the federal money runs out," Mr. Sanford says.

The Medicaid money for states is also a fiscal time bomb. The stimulus bill temporarily increases the share of state Medicaid bills reimbursed by the federal government by two or three percentage points. High-income states now pay about half the Medicaid costs, and in low-income states the feds pay about 70%. Much of the stimulus money will cover health-care costs for unemployed workers and single workers without kids. But in 2011 almost all the $80 billion of extra federal Medicaid money vanishes. Does Congress really expect states to dump one million people or more from Medicaid at that stage?

The alternative, as we've warned, is that Congress will simply extend these transfer payments indefinitely. Pete Stark, David Obey and Nancy Pelosi no doubt intend exactly this, which could triple the stimulus price tag to as much as $3 trillion in additional spending and debt service over 10 years. But the states would still have to pick up their share of this tab for these new entitlements in perpetuity. Thanks, Washington.

Governors are protesting loudest over the $7 billion for unemployment insurance (UI) expansions. Under the law, states will increase UI benefits by $25 a week. The law also encourages states to cover part-time workers for the first time. The UI program is partly paid for by state payroll taxes imposed on employers of between 0.5% and 1% of each worker's pay. Mr. Barbour says that in Mississippi "we will absolutely have to raise our payroll tax on employers to keep benefits running after the federal dollars run out. This will cost our state jobs, so we'd rather not have these dollars in the first place."

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This is the way Democrats screwed up before and led to the Republican revolution in 1994. While the programs are not unfunded mandates, they are a time bomb for states who would be forced to raise taxes in two years to continue to fund them. Those taxes would be job killers. It is a prescription to make all the states into a dysfunctional California/France.

The Democrats will be using the politics of fraud against these governors in the coming days to put pressure on them to accept this bad idea. It is important that hey develop a coherent message to explain what is wrong with the narcotic stimulus.

CNN reports that California governor Arnold Schwarzenegger is eager to take the narcotic federal money, but then he would be out of office when the debt comes due. At this point it does not appear that California is willing to be serious about the costs of liberalism to the state in terms of debt and population flight.