Can one say; unfunded federal mandates and feveral crowding out of state's taxing capacity?

The finances of the states is in critical condition and I suspect that there will be a handful of states that will be forced to renegotiate their vebts and their pension and health obligations before this is all over.....

But there is one place where reality is already starting to bite in America and that is in terms of state finances. Just look at the statistics. A report from the US Center on Budget and Policy Priorities issued last month estimates that in fiscal 2010 the US states collectively posted a $200bn-odd budget shortfall, equivalent to 30 per cent of all state budgets.

Last year, that pain was partly eased by Barack Obama’s stimulus package(s). But that spending splurge is now fading away. And in fiscal 2011 and 2012, the states are expected to face another combined budget deficit of $260bn, with the 2011 shortfall in places such as New Jersey, Illinois, Nevada and Arizona projected to be more than 35 per cent of last year’s budget.

The principle issue here is that during good times, states spend lavishly and during bad times these lavish spending habits are unsustainable. But even more insidious, is that the United States federal government mandates spending by states for various initiatives such as health and welfare without providing funds to meet these obligations. Additionally, states are limited in their ability to tax since higher taxes in one jurisdiction may cause tax payers to shift to other states where taxes are lower. This competition amongst the states limits the ability of one state to increase taxes and additionally impacted by the large amounts of taxes already collected by the federal government. It is also important to note that the federal government is not subject to this competition as the states are since citizens are not as open to moving to other countries and even those that do, are subject to federal taxes on global income (most nations do not tax global income).

FT.com / Markets / Insight - Reality of America’s fiscal mess starting to bite