Beyond the problem with the shortfall of funds from the cities and states due to the present recession is the knowledge of the strategy that is in place that hopes to fundamentally change the economics and resource distribution for America.
Cities and States are required to balance their budgets. They must either raise taxes, cut spending or issue bonds (for capital projects rather than general operating funds).
The Federal government by comparison has the ability to both run a budget deficit, sell treasury bonds to raise money and they can leverage the Federal Reserve Banks (a quasi-independent agency) to create new money for the economy.
It should be troubling to those who are interested that the Federal money which is flowing to the states and municipal governments that all of this money is DEBT MONEY. Where as the news media is trumpeting the "rescue funds" which is allowing people to retain their jobs or to do certain repairs - few of them are framing these funds as "credit card cash advances" drawn to pay the rent for the month.
The critical problem from my perspective is that most Americans believe that there are no consequences for making and spending "magic money". Thus anyone who questioned the use of this money were subjected to attack. In fact some operatives wanted even more debt money to be spent because they believe that the immediate economic situation is more important than the long term consequences of this increased debt.
One only needs to step back and look at the diversion that is going on here. A certain "dream come true" situation is before us. There is an attempt to shift spending from individuals and local governments up to the federal government with the feds playing a bigger part in our individual lives than ever before. On the face this abstracts individuals and local governments from their resource constraints. In theory allowing the central government to tax and spend removes the "capital departure from political boundaries" effect because no one can escape the taxing arm of Uncle Sam.
The second part of this strategy is were the problem resides. On the one hand the goal is to codify an individuals "right" to certain social entitlements and thus the government is the entity that will fund these rights. The fulfillment of the demand for these resources will grow the federal budget. Concomitant with this "social justice" distribution is the requirement to RAISE TAXES in order to fund all of this largess.
At a time when local governments are imposing taxes upon the populous while individual tax payers are pushing back because they can't take any more (still others are demanding tax reassessments to lower their property tax bills) the proposition for "MAGIC MONEY" from the federal government seems like an enticing way to solve these problems for the individual.
Thus the tax paying citizens are partitioned into "THE RICH" and "THE WORKING CLASS" and "CORPORATIONS". In researching the financial affairs of the city of Philadelphia which is having massive problems with its finances the individual citizens were opposed to increased taxes upon themselves but were comfortable with imposing taxes on corporations. Likewise a graduated wage tax where the high paid people would also get hit were attractive.
I wonder why some people are so averse to understanding history? The Federal Income Tax, the Alternative Minimum Tax started off as "Taxes upon the rich". You now see that the voracious appetite for money by governments always allows these taxes agreed to via class warfare coming their way in due time. I know of several tollway taxes that were originally supposed to be temporary, going away when the road was paid for. Long after the road has been paid for, the toll remains.
Beyond the increased tax load upon the individual and other sources are the views of the creditors to the United States. They purchase Treasury Bonds as an expression of their confidence in the economic system in the United States. As the system becomes less credible in that it makes more use of "magic money" the likelihood that they'll ever see their money back with its associated value is decreased. They will need to be prompted to purchase these bonds via higher interests rates. Just as a risky credit card borrower will be hit with a higher interest rate to defray the risks - so is the case with higher interest rates on bonds in order to sell the debt to the investors. The state of California which is on the financial skids has the worst credit of all states and thus is charged more to service its bond debt.
I am not making any particular predictions about what is going to happen. I am only documenting a local case as to where we are going. It is my belief that the centralizing of our finances is a mistake. It gives the short term impression that we can give more resources to more people and thus overcome the constraints of economic scarcity. In such a system the masses are made to "vote themselves a pay raise" rather than being forced to be keenly aware of the importance of their own industriousness in adding value to the bucket.
Since individual man is self serving it is "the system" that will enforce the needed discipline upon the economic activities as a means of retaining the integrity of the system.
Having shifted your economic fate from your own back and your communities back up to the big pot of money in the sky - you have made yourself more dependent upon but less competent in your ability to maintain the standard of living that you reside at.
In a historic first, Uncle Sam has supplanted sales, property and income taxes as the biggest source of revenue for state and local governments.
The shift shows how deeply the recession is cutting. Federal stimulus money aimed at reviving the economy and a sharp drop in tax collections have altered, at least temporarily, the traditional balance of how states, cities, counties and schools pay for their operations.
The sales tax had been the No. 1 source of state and local revenue since the mid-1970s, according to the Bureau of Economic Analysis. Before that, property taxes were the primary source. That changed in the first three months of 2009.
Federal grants — early stimulus money plus conventional federal aid — soared 15% in the first quarter to a seasonally adjusted annual rate of $437 billion, eclipsing sales taxes, which fell 2%.
The dominance of federal money is set to expand dramatically this year because tax collections are sinking while the bulk of federal stimulus aid is just starting to arrive. "This money isn't manna from heaven. It comes with a price," says Indiana state Sen. Jim Buck, a Republican. He worries that the federal money will leave states under greater federal control and burden future generations with debt.