More than half the states faced budget gaps as of December 2008, for a combined total of nearly $30 billion. According to Lynndee Kemmet, AIER Visiting Research Fellow, in the February 2 Research Reports, the picture is only going to get worse. In fiscal 2010, total state budget gaps are expected to more than double to around $64 billion.

Maybe much of this shortfall could have been avoided had more state governments followed the recommendations of The Heartland Institute. In 2006, the Chicago-based research institute devoted to free-market solutions to economic and social problems published the booklet Ten Principles of State Fiscal Policy.

As states struggle to put their finances in order and increasingly look to the federal government to solve their problems, Heartland’s simple recommendations seem particularly relevant.

1. Above all else: Keep taxes low. The evidence is clear and has been for many years: High taxes hinder economic growth and prosperity.
2. Don’t penalize earnings and investment. Taxes on earning and investment income are particularly harmful to economic growth.
3. Avoid “sin” taxes. Taxes on specific goods and services are often unfair, unreliable, and regressive.
4. Create a transparent and accountable budget. Focus attention and resources on providing those services that are the core functions of state government.
5. Privatize public services. Privatization is a proven way to reduce government spending while preserving or improving the quality of core public services.
6. Avoid corporate welfare. Subsidies to corporations and selective tax abatement are questionable politics and bad economics.
7. Cap taxes and expenditures. A tax and expenditure limitation (TEL) protects elected officials from public pressure to spend surplus tax revenues during good economic times.
8. Fund students, not schools. States and cities that have experimented with school choice have seen gains in academic achievement.
9. Reform Medicaid programs. Spending on Medicaid can be brought under control without lowering the quality of care received by Medicaid patients.
10. Protect state employees from politics. State and local governments should be prohibited from deducting funds used for political purposes from the paychecks of public workers.

The complete booklet, which is part of Heartland’s Legislative Principles Series, can be downloaded for free from www.heartland.org. 

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