According to an ABC/Washington Post poll, the real third rail of politics isn’t Social Security it is state budgets. According to the poll results, 55 percent of Americans favor freezing wages for state employees and 51 percent are for reducing pension benefits for new hires.
But when asked more specific questions about cuts, 89 percent oppose laying off firefighters, 86 percent don’t want teachers or police officers laid off. Seventy five percent of people reject cuts to state aid for schools, 76 percent reject cuts to Medicaid, and 76 percent also oppose closing parks. At the same time, significant majorities oppose tax increases (though not as robustly). Sixty-three percent of those polled oppose increases in state income taxes, 61 percent oppose sales tax hikes.
What to make of these results? People don’t like tax hikes, and they really don’t like service reductions. They are also not confronted with the full bill for public services upfront.
State aid, debt, income tax withholding, spending deferrals, intergovernmental transfers contribute to fiscal illusion, by obscuring the full cost of spending and making spending look less expensive than it is.
More direct forms of taxation such as the property tax tend to be less popular for a reason. The property tax is more directly observed – both in paying for it and seeing how it is spent. (though it is also argued that renters experience fiscal illusion since they do not pay property taxes upfront).
New Jersey’s property tax crisis is an example of this. While the state instituted an income tax in 1976 to help defray the cost of public school spending on the local level, property taxes continued to rise over the period – in recent years to crippling levels for many residents. In 2010, when confronted with reductions in state aid and revenues and the request by teachers unions to grant salary hikes, New Jersey voters rejected the majority of school budgets for the first time since 1976.
It is not surprising that people will want to maintain or increase spending as long as the bill remains hidden. More than half of state Medicaid programs are sustained by federal transfers paid for with deficit spending, continuing to participate in this fiscal illusion has serious consequences for our economic future.
Tyler Cowen writes in The New York Times about how this disconnect between spending and revenue (identified by James Buchanan), results in institutionalized fiscal irresponsibility. Ultimately, we don’t recognize what it will take to pay off the debt we have accumulated at the federal level. It will take eroded savings, “…there is a rude awakening coming. One way or another, some of our savings will be taxed away to make good on government commitments, like future Medicare benefits, which we currently are framing as personal free lunches.”