jmherbenerStandards of living are lowered when resources are moved out of the hands of entrepreneurs whose production decisions must pass the test of profit and loss and move into the hands of bureaucrats whose production decisions are not subject to the test of profit and loss. This reduced efficiency is the primary effect of government control over resources and occurs regardless of the method of financing government expenditures.
Compensation paid to government employees are financed either by taxes, debt, or monetary inflation. In the case of taxes, the income of taxpayers is coercively extracted and transferred to government employees. Taxpayers have both lower after-tax incomes and lower standards of living. In the case of debt, the income of taxpayers is coercively extracted and transferred to the holders of government bonds. Once again, taxpayers have both lower after-tax income and lower standards of living. In the case of monetary inflation, the income of the late recipients of the new money is transferred to government employees and the early recipients of the new money. While the nominal after-tax income of taxpayers may stay the same (or even rise), their standards of living decline.
Even though most states have a balanced budget amendment, they also have outstanding debt. So the distinction between a state, say California, and the federal government is one of degree, not kind.
http://www.usdebtclock.org/state-debt-clocks/state-of-california-debt-clock.html