Who will lose when the states can't pay?

A recent article published on the California Independent Voter Network web site discusses the coming default by states on their financial obligations.  Like most other articles of its ilk, the information is presented in news report like fashion.  Some details are given, the discussion options are listed but the reader has to come to his own conclusions.  While this is nice for some people who already have lots of background, it amounts to noise for most people because it simply says "something will happen".  Gee thanks for the insight...

My view is that we start off with math and work from there.  Without going into all the details, the math says that state obligations far exceed their ability to collect revenue to pay for them.  Why avoid the details?  Several reasons.  First, all you have to do is look at the magnitude of the budget shortfalls, the fact that they keep growing each time they are reported and the silly solutions being offered to handle them such as Governor Schwarzenegger's suggestion a year ago that bonds be sold to cover the shortage which will be repaid by future lottery earnings.  Of course that quickly fell through but the fact that it was offered in the first place demonstrates the level of clueless desperation involved. 

The other reason not to provide details is that we really don't know what they are.  States have been acting like shadow banks in many ways, including keeping double sets of books.  In other words, states carry huge liabilities off balance sheet so that even after balancing the budget they will still not actually be balanced.  In other words, states have been operating fraudulently and the only way it is all going to finally get cleared out is through some form of bankruptcy.  Then and only then will the true magnitude of the corruption become fully known because that is when their lawyers will throw in the kitchen sink.  Anything that can be written off and dismissed will be written off and dismissed.

Of course the article suggests that maybe the states can just raise taxes to cover the short fall but that strategy is already falling apart.  People are moving out of states with higher taxes because several states still have reasonable taxation levels for individuals and businesses.  In my home state of Texas there is no state tax on personal income.  Yes, you will pay more in property tax than in other states but not nearly enough to make up for payroll taxes of, say, California's 9.55% for those making over 47k (i.e. everyone above the poverty level...).  As an unretired person I would much rather pay property tax than income tax because it means I can control my tax bill by where I live as opposed to by how much I make.  Also, if I feel the tax is too high I can contest the property value.  This is not possible with income tax.

Someone is going to have to pay for the fact that states are essentially bankrupt.  You can try to place that burden on the workers and businesses but at some point they will just leave.  If your workers leave then with them go their value creation abilities and the remaining people have to be taxed at an even higher rate in order to make up for lost taxation.  It can become a downward spiral.  At some point all you have left is the nonproducers who are looking for their entitlement payments even though no money exists to make them.  This is why the states will eventually go bankrupt and the bondholders will eventually have to take the haircuts.  They stupidly loaned money to spendy governments and so they should be forced to eat the losses associated with this unwise move. 

Note that the ability to vote with your feet is a huge value associated with having multiple governments in the world.  Governments, especially at the state level but at the sovereign level as well, have to compete for your presence.  If you don't like how they are acting you can just leave.  However, if we ever we allow one world government to form there will be no place for dissenters to go in order to escape and so their only option will be to fight back.  It is thus easy to see why statists want one world government.  Once there is no place else to go they will have complete control (except for the terror factions that will obviously oppose them...).