I came across an interesting article in the Wall Street Journal, (for subscribers to the online edition: http://preview.tinyurl.com/4vt83mr), regarding how States rely upon the rich to pay the bulk of taxes needed to run their governments. This particular story begins in California; a state where nearly half of the income taxes collected before the recession came from the wealthy top 1% of earners. Those are households that earn close to a half-million dollars a year. It then moves on to discuss New York, New Jersey, Connecticut, and Illinois – states that most heavily rely upon the wealthy to keep their budgets intact.

During the boom years, the rich were manna from heaven from these states. Now that we are in a deep recession that seems as though it is never going to end, those states are suffering from major shortfalls in tax receipts from their previous “gold mines”. Mr. Brad Williams, a former economic forecaster for the State of California sums up the current situation regarding taxing the rich and relying upon those receipts as steady income streams as follows:

Mr. Williams and his peers had been warning the California government for over a decade about their over-dependence on tax receipts from the wealthy. Of course, they didn’t listen very well. Heeding that warning might have slowed spending and the expansion of government intrusion into the lives of individuals as it attempted to promote their “we’re from the government and we’re here to help” agenda of buying votes to get or to retain political power and influence through individual political leaders.

You see, it turns out that the “rich” are a very unreliable source of revenue, but not for the reasons that most people assume. It turns out that the rich suffer from volatile incomes. Most wealthy people invest heavily in the markets and count on bonuses and such to augment their base salaries. When the economy suffers, they suffer with it in a greater proportion than non-wealthy populations do. This is one of the reasons California finances crashed so quickly. When the market crashed, incomes, among the wealthy, fell drastically. As those incomes fell, so did tax receipts and as tax receipts fell, California became more insolvent.

The same is true for those other states I mentioned. Worse yet, the drop in revenue from the heavily relied upon, so-called wealthy, came at a time when states were looking for ways to pay for the oversized public spending programs they had championed. The difference is that the rich had been used to living with volatile incomes; state and local governments were not. They have to deal with the pressures of today’s economics more severely than does the federal government, because, unlike the feds, they can’t print their own money to keep the “man behind the curtain” hidden. In states, “the man” is plainly visible for those willing to open their eyes and he is being pummeled at every turn in the road for not doing enough.

The response by some states to their revenue drop has been to increase taxes on top earners. The problem is that while this may sound helpful, in theory, the incomes of the top earners has fallen by 16% compared to a fall by 4% for earners as a whole in the United States. Only a fool would build a house on an unstable foundation. Building tax and spend policy based on volatile income sources is just as foolish. In fact, it is insane as well as morally reprehensible.

Of course, states suffer from other factors as well: high unemployment, declining property values and the rising cost of bloated pensions and health care promises. Spending has grown dramatically over the past 10-20 years. Just look at Billerica’s budget for the year 2000 and compare it to today’s budget and you get an inkling of how similar spending patterns in states and by the feds have eaten up tax monies and burdened individuals, including the rich. These factors are all the more reason for looking at how to structure tax and spending policies with the most stable and predictable of building blocks.

It’s time for government to grow up and act like responsible adults by limiting spending to something short of earnings just as ordinary folk have to do. It is beyond me how individuals who must balance their budgets every day don’t impose those same values on government by demanding fiscal responsibility. The fact that government is spending much more than it takes in ought to tell everyone that there are no free rides and that we ought to insist that more people step out of the wagon and help push. However, the opposite seems to be taking place because government is not only providing a wagon; it is furnishing steps and holding the tailgates down to encourage and assist even more people to step in.

This is something that just should not be. Let’s send the politicians, who cannot wean themselves off of this spending spree, to rehab, and let’s hire replacements who are able to decline the narcotic of spending other people’s money for every fantasy that enters their ever wandering minds.