President Obama and Congress need to appoint U.S. Sen. George Voinovich to chair a bipartisan, intergovernmental commission to assess and make recommendations on the credit crisis confronting the nation’s state and local governments.

The emerging global economic recovery is likely to leave municipalities far behind, bedeviled by the deepest erosion of revenue in more than a century, the expiration of the federal stimulus program, federal capital-investment inertia, and a state and local tax system that no longer reflects the U.S. economy.

With Washington seemingly immobilized by partisanship, the inability to address the nation’s critical capital infrastructure needs is likely to add up to significant repercussions for the municipal bond market.

After the Depression, it took nine years for municipal financing volume to recover. The challenges the market confronts this time will be unprecedented.

Last month, Moody’s economist Mark Zandi, testifying on Capitol Hill before the U.S. Financial Crisis Inquiry Commission, said: “Despite the massive financial aid provided by the stimulus to state and local governments, their budget problems continue to intensify. Tax revenues are off an astounding 9% for fiscal 2010, by far the largest decline since just after World War II.”

“Personal income, capital gains, sales, corporate income, and property tax revenues are all off sharply. Adding to the budget pressure, rainy-day funds in most states are depleted, most of the gimmicks used to balance budgets are exhausted, and it has become much more difficult for municipalities to issue bonds without some support from the federal government,” Zandi said.

And, even as state and local revenues are experiencing precipitous and lasting declines, state and local Medicaid spending is projected to have increased by 9.9% last year, as rising unemployment slammed the program and state and local budgets.

Next year, with the expiration of the single largest source of state revenue — the federal stimulus program — state and local governments will face record levels of residential and commercial foreclosures, homelessness, health care, and other recession-created needs, with far lower revenues. Unlike the federal government, they must balance their budgets.

And as the Economist has noted: “Like the eurozone’s members, America’s states have no currencies of their own to devalue ... The budgetary strains in America’s 50 states and 52,000 [sic] municipalities get too little attention.” New Jersey Gov. Chris Christie on Feb. 11 declared a “fiscal emergency,” allowing him to reserve or freeze state spending as part of his plan to tackle one of the largest 2011 deficits among U.S. states.

The fiscal situation for cities and counties is likely to deteriorate even more, because significant cuts in state assistance and higher residential and commercial property foreclosures will undercut their most critical revenues. The number of Americans who owed more than their homes were worth was virtually nonexistent when the real estate collapse began in mid-2006, but by the third quarter of 2009, an estimated 4.5 million homeowners had reached that critical threshold, with their home’s value dropping below 75% of the mortgage balance.

By June, every indication is that 10% of all residential mortgages will be under water. David Rosenberg, chief economist and strategist for Gluskin Sheff & Associates in Toronto, expects further declines in  U.S. housing prices of 10 to 15% over the next few years, and estimates that fully half of the mortgage-holding population in the country could be underwater by 2011.

The Congressional Oversight Panel, in its February oversight report, “Commercial Real Estate Losses and the Risk to Financial Stability,” found that “a significant wave of commercial mortgage defaults would trigger economic damage” — with local government revenue high on the list of those injured.

But the reduction in state and local tax revenue is not just because of the recession. It is also due to permanent, structural changes in the economy. Any effort at the national level to address the nation’s capital investment needs will require a reassessment of our tax systems.

The administration and Congress are paralyzed about how to pay for reauthorization of the nation’s expired surface transportation funding system, where the traditional means of a gas tax used by the federal and state governments has been rendered outdated by rapidly changing gas-mileage standards.

Meanwhile, what traditionally was the single largest source of state and local tax revenue — the sales and use tax — is out of step from our emerging bifurcated economy. Last year, retail trade declined 7.1%, wholesale trade 8.2%, and manufacturing 10.6%. Yet, virtually simultaneously, selective parts of the U.S. economy — or, more precisely, the iEconomy — saw explosive growth.

The iPhone and new generations of smart phones are multifunctional devices that permit one to watch movies, read The Bond Buyer, or listen to the Beatles. One out of every five new applications introduced for the iPhone last month was a book. There are already 84 million smartphones in this country, and Apple has already sold more than 50 million iPhones and iPod Touches. iTunes song purchases exceeded five billion two years ago and 10 billion this month.

Digital sales account for 30% of revenue in the U.S. music market. So the single most important source of state and local tax revenue is based upon, for the most part — and unlike the economies and tax systems of every major U.S. competitor — tangible goods, a species disappearing from the American economy.

Two hundred and twenty-three years ago, a corporation, the city of Philadelphia, hosted the nation’s states at a convention to create our federal government and federal system. One of the most difficult issues was the relationship of sovereignty and taxes. But for a new nation, just emerging from a fearful war with significant debts incurred, the issue was vital and desperate: to build the foundation for interstate commerce.

Today, our country is at war. Across the Pacific, China is making extraordinary investments in its infrastructure as part of an effort to make its economy the most powerful on earth. In the U.S., the challenges that confront all three levels of government are as difficult as at any time since 1932 — and maybe since 1787.

Creating a federalism commission would be a natural next step. Selecting a leader who has served in every kind of federal, state, and local government, and who cares passionately about our future, would be an obvious choice. Following the commissions of 1973 and 1983 (“City Financial Emergencies: The Intergovernmental Dimension,” and “Bankruptcies, Defaults, and Other Local Government Financial Emergencies”), it will be fundamental to assemble serious leaders to put together solutions to re-bond the nation.

Just as the European Union has no choice but to step up and help Greece, the fate of state and local governments in America is no longer a parochial event with few national repercussions.

States are now the workhorses of our federal system — if they collapse, so does Medicaid, homeland security, transportation, and job training. Local governments are not only the home of all Americans, but also provide the public educational infrastructure that will determine the country’s destiny. In short, we have become a vertically integrated conglomerate where the fortunes of one subsidiary affect us all.

The roads and bridges, water and sewer systems, hospitals and universities not only bind the nation together, but make up the foundation of its human and physical infrastructure — and are almost entirely the product of state and local investment through the municipal bond market.

Thus the nation has a stake in ensuring the fiscal health and access to credit markets of these levels of government. That requires not a top-down, we-know-best approach, but rather one of constructive, mutual respect.

George Voinovich, 74, the senior Republican senator from Ohio, has been there. A bipartisan, intergovernmental commission to assess and make recommendations on the credit crisis confronting the nation’s state and local governments is essential for the nation’s competitive future.

Frank Shafroth has worked in the Senate for the Banking Committee and the Housing and Urban Development subcommittee, served as chief of staff for Rep. Jim Moran, and was policy and federal relations director for the National League of Cities and National Governors Association. He is an adjunct professor at George Washington and George Mason universities, a columnist for State Tax Notes, and a consultant, including for the MSRB. His views are his own and do not represent those of any of his employers.