The current recession has caused many states to deplete their rainy day funds, and if politicians in Washington have anything to say, governors could see their deficits grow even further. The Waxman-Markey cap and trade bill will prolong and exacerbate the recession and stifle any chance of a quicker economic recovery. The goal of cap and trade is to drive up energy prices so high people will use less energy, but even after reduced consumption, people still need to drive their cars and turn on their lights at home. All cap and trade does is force people to spend more on their energy bills. These higher energy prices result in a slower economy, which means less production, higher unemployment, and reduced income. This is bad news for states.

The increase in state’s deficits that result from the Waxman-Markey legislation will force painful cuts in state services and/or tax increases. Economists at The Heritage Foundation found that the average impact on operating surpluses (deficits) at the state and local level is a decrease of $9.3 billion dollars (in 2009 inflation-adjusted dollars) between 2012 -2035. The baseline forecast predicts states, overall, will run budget deficits through 2015 but because of the Waxman-Markey bill, these aggregate state deficits will continue through 2017; that is two more years of painful choices for state and local politicians and two more years of reduced state services for those in the population who probably most need them. The table below shows the increase in deficits (or decrease in surplus for those states with operating surpluses) by state in the year 2012 alone, as well as the current budget turmoil states are facing. The sum total shortfall for the 50 states and their localities in 2012 is -$5.3 billion (in 2009 inflation-adjusted dollars).

Governors of each state are seeking to pinch every penny they can out of their respective budgets. California is the most infamous case, where “the state’s deficit ballooned 42% to $21 billion from $15 billion in just a few months.” After the Los Angeles Lakers hoisted the Larry O’Brien trophy a few days ago, citizens and local officials expressed outrage over spending taxpayer dollars on a $2 million parade. Paul M. Weber, president of the Los Angeles Police Protective League asserted,

“At a time of financial crisis, when the public expects — and quite frankly should demand — city leaders to be good stewards of every tax dollar, it is foolish for elected officials to favor spending 1 million tax dollars on a three-hour parade.”

In the end, the owners of the Staples Center, the home to the NBA champs, and private donors covered $1.85 million of the $2 million tab. Will private investors be so generous to pick up the $625 million bill for California in 2012? What about the next year? More importantly, what will they get for this investment? After all 50 states incur a decrease of $ 9.3 billion on average from 2012-2035, global temperatures will be lower by only hundredths of a degree in 2050 and no more than two-tenths of a degree at the end of the century. Let’s not forget that this is on top of higher energy prices pushing unemployment up by 1,145,000 jobs on average, with peaks over 2,479,000. In aggregate, GDP would drop by over $9.4 trillion, and the next generation will inherit a federal debt of $28,728 per person.

At least when they spent $2 million they got a parade in return.

Karen Campbell, Policy Analyst, Macroecomomics, Center for Data Analysis, co-authored this post.