Absurdity of the funding flow

It resembles absurdist theater.

Following the flow of money between cities, states and the federal government has always been an exercise in futility. The states and cities, along with other local governments, have often scrambled for money in ways that are beyond comprehension.

This is an apt time to reassess the funding flow as new developments surface. Most chilling is the bill that 30 states must pay for federal loans to provide unemployment benefits. California owes $9.7 billion; Michigan, $3.7 billion; New York, $3.2 billion; and the lowest, Hawaii, $24 million.

While many states are already cutting services, laying off employees and/or raising taxes, they must decide how to repay $41 billion to the federal government, and federal officials project that the debt could rise to $80 billion. This fall, the states will be charged $1.3 billion in interest.

This situation turns economic theories on their head. The shallow solutions considered or already executed by the states involve taxing businesses and borrowing from new sources - after borrowing from the federal government.

At the same time, Congress bestowed a $114 billion Christmas gift onto the wealthiest two percent of Americans for the next two years for income tax cuts and a reduction in the estate tax.

Other ludicrous examples of the funding stream:

- Pennsylvania, at this writing, could run out of money on Feb. 28, 2011, to subsidize health insurance for 40,000 low-income working people;

- New York City was accused in a Justice Department lawsuit of overbilling Medicaid by “at least tens of millions of dollars,” possibly because the city sought to avoid spending its own money for more intensive services;

- Virginia’s governor proposed dipping into the state’s sale tax revenue to spend $140 million on road projects, which critics contended was a bandaid approach, anyway;

- New York’s Bravest - the FDNY - planned to charge up to $490 when responding to car crashes in hopes of raising $1 million yearly.

Not to mention all kinds of other previous ploys to raise money that can be recalled offhand. A round-trip train trip that cost $21.50 from Trenton to Manhattan on April 30, 2010, operated by New Jersey Transit, rose to $31 the next day. Pennsylvania’s last governor unsuccessfully sought to lease the Pennsylvania Turnpike and charge tolls on Interstate 80, and his successor now wants to sell off the state-controlled liquor store operation.

Police departments are notorious for fining drivers for moving violations and illegal parking for which cities budget. Casino gambling has become a money machine for Pennsylvania, Connecticut and other states.

President Obama, denied a public-option as part of health-care financing, seeks to stabilize funding of medical insurance by requiring all citizens to pay for coverage.

California, New York and the other 28 states that owe the federal government $41 billion borrowed the money because they needed help to fund benefits for millions of unemployed people, as outlined in a New York Times article.

With the bill coming due soon, the situation cannot help but bring to mind a scene from a scene on “Seinfeld” when actor John O’Hurley, as Elaine’s boss, parodies a mad army general played by Marlon Brando in “Apocalypse Now” who tells Elaine: “You are just an errand girl sent by grocery clerks to collect a bill.”

The reality resembles a parody of genuine governance.

The Times piece explains that the states hoped that the economy would have improved considerably before the first interest payments came due or that future Congresses might revise the terms. But the economy has yet to improve enough and the new Republican-controlled House of Representatives does not seem interested in bailing out the states.

The $41 billion debt is separate from additional weeks of unemployment benefits Congress approved in the stimulus and then extended in late December with the tax cut compromise; federal funds will pay for the extended weeks, the Times reports.

The states borrowed the $41 billion to continue funding their basic unemployment compensation, which generally runs 26 weeks.

To pay the interest on the federal loans, the two most populous states - California and Texas - resorted to borrowing. New York, third largest, is raising payroll taxes on employers and Arizona may go that route.

It is ludicrous that any state would borrow funds from one source, and to pay the interest borrow from another source.

California plans to borrow from a trust fund for disabled workers to pay $362 million to the federal government; total debt is $9.7 billion, highest in the nation. Texas used the bond market to borrow $2 billion to return all the money it borrowed; it judged that the interest on the bonds, which are backed by a tax on employers, would cost less, according to the Times account.

New York and Arizona’s response contradicts the Republican argument for extending tax cuts on the wealthy. GOP members of Congress argued that raising taxes on the rich would prevent small businesses from hiring new people or starting new companies at all. That would be the logical outcome of what these two states could be doing.

New York will charge a tax surcharge on employers to pay $115 million in interest on $3.2 billion, the Times reports. Arizona is considering legislation that would pay off both the principal and interest on $258 million by temporarily raising taxes on employers.

In late December, Congress passed legislation to extend tax relief for the wealthy the next two years that will cost nearly triple the amount states owe the federal government, $41 billion against $114 billion.

The White House Web site states that continuation of the tax cuts for the wealthiest 2 percent of the nation will cost $91 billion, and the Estate Tax reduction will cost $23 billion.

As Obama pointed out, rich Americans have not asked for lower taxes. The evidence at hand indicates that they are not bothered by higher taxes for them. States and congressional districts with substantial concentrations of the wealthy are represented by Democrats, notably in locales such as Beverly Hills and Manhattan’s Upper East Side.

That money could have readily covered the money borrowed by the states.

Another obvious funding drag would be our wars in Iraq and Afghanistan. There are pros and cons about our foreign ventures, but hundreds of billions of tax dollars have been diverted in that direction.

We cannot be under the delusion that higher taxes on the wealthy and ending the wars will constitute a panacea, but it would certainly make a dramatic difference.