John Hood's Daily Journal

Got to Pick a Pocket or Two


By John Hood, April 21, 2011

RALEIGH – Consider some of the stories making news in North Carolina in the past few weeks:

• Gov. Bev Perdue seeks a disaster declaration to make the state eligible for federal recovery funds in the aftermath of devastating tornadoes.
• Some Republican lawmakers in the General Assembly try to block North Carolina’s participation in a federal high-speed rail program they view as fiscally irresponsible.
• The GOP legislature passes a bill that both extends jobless benefits and approves a continuing resolution to keep state government operating past July 1 if there is no signed state budget. Perdue vetoes the bill, arguing that she shouldn’t have to agree to future state budget cuts in exchange for extending federally funded benefits.

Although these are separate events, they do have a common theme: the pursuit of federal funds for North Carolina projects. As Washington’s role in public finance has continued to expand, it’s difficult to find any state or local issue that isn’t touched by it. For almost every major state program – public schools, colleges, Medicaid, and transportation – federal funds play a large and growing role.

As a result, federal politician and bureaucrats have gained power at the expense of state and local ones. That, in turn, has accentuated the influence of special-interest groups – for whom it is less expensive to wield influence over central authorities in Washington than over dozens or hundreds of separate jurisdictions – and diminished the influence of average taxpayers.

Furthermore, the entire political debate has been distorted by the myth of “federal” funding. In a financial sense, there is no such thing. It is metaphysically impossible for “Washington” to fund “the states” with revenue that is not raised in the states, either immediately in taxes or by future taxes to pay off today’s federal borrowing.

In the case of the budgetary showdown between Perdue and the Republican legislature, for example, the governor and her allies insisted that there was no logical relationship between jobless benefits, extensions of which would be financed with federal funds, and balancing the state budget. They saw the legislation combining the two issues as little more than political blackmail.

Republicans didn’t see it that way. Yes, they were seeking to exercise some leverage over Perdue, who has been on a veto streak lately. But they also rejected the notion that extending North Carolina’s jobless benefits would have no impact on North Carolina taxpayers.

For one thing, the federal funding for extended benefits is a temporary feature of past stimulus legislation, not a permanent policy. In 2012, that extra federal funding disappears. A vote to extend benefits today could become a precedent for 2012 extensions that would have a fiscal impact on state government.

More importantly, however, all North Carolina taxpayers are also federal taxpayers, by definition. Directly or indirectly, they bear the incidence of federal taxes that flow to Washington and then (sometimes) flow back to North Carolina, albeit with a substantial debit for shipping and handling charges.

The “federal” funding for extended jobless benefits in North Carolina won’t come from New York or California. Those states also have unemployed workers receiving benefits. The funding will come from North Carolina. It will come out of the same pockets of the same households and businesses that would also be asked to pay higher taxes if Perdue’s state budget plan prevails over the GOP alternative.

That’s the connection. Perdue and her defenders seem to believe that if they insist loudly enough on the distinction between my left pocket and my right pocket, I’ll forget that both pockets are on the same pair of pants – and that regardless of which pocket gets picked, the money comes from the same bank account.

As I have previously observed, when politicians promise to fight harder to bring more “federal” dollars back to North Carolina, that’s like responding to chronic shoplifting or embezzlement at your store by hiring thieves to steal money from other stores. It would be better to hire guards to protect our own stuff in the first place.

That’s what North Carolina’s elected representatives ought to be doing.

Hood is president of the John Locke Foundation
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