But a great deal of state and local spending is tied to federal entitlement programs, especially in health care. States receive block grants from the federal government and, in return, take on responsibility for funding public health care and other programs in return. Unfunded mandates push states further into fiscal trouble.
Exhibit 2: Federal vs local tax collections
With income and sales depressed, state and local governments rely on property tax revenues more than ever.
Exhibit 3: Property taxes as percentage of total state and local revenues
Source: Census, Case-Schiller 20 City Index
Property tax collections have continued to rise, even while home prices have collapsed. Local property assessments lagged behind actual prices during the bubble years, but have not fallen to reflect the 40% decline in home prices.
Exhibit 4: Property tax revenues vs home prices
Source: Census Bureau
Property taxes have risen so far that a prospective homebuyer today will pay as much in real estate taxes as on mortgage interest.
Exhibit 5: Property taxes vs home mortgage interest (mortgage debt outstanding multiplied by current mortgage rate), in $US billions
Source: Census Bureau, Federal Reserve
We’ve already had an extensive discussion of the problem at this blog. With more Americans than ever dependent on the federal government (18% of all personal income now comes from transfer payments, and 50 million Americans are on food stamps), Republicans face a dilemma: If we state boldly that spending must be slashed, a lot of people will think that it means tightening their own belt. In the short run, they will be right, although in the long run, everyone will be poorer if we fail to do so. The danger is that the entitlements system will reduce too many Americans to feeling like state dependents.