Wednesday, February 01, 2006

The Bane of a Budget Surplus

As I have noted previously, there is no end to government “need” for taxpayer money. At the moment, Utah is swimming in an unprecedented excess of that commodity. The huge problem seems to be what to do with it.

Conventional wisdom on one hand says that since taxpayers have been grossly overcharged, the right thing to do is to return the excess. Conventional wisdom on the other hand says that since there are so many “under funded” government programs, if we can’t afford to properly fund them now, we never will.

Utah is one of the many states that are grappling with stunning budget surpluses. The roaring economy has resulted in nationwide average state tax revenue increases of 8.7% and 8% in 2004 and 2005 respectively. This provides some evidence that the best way to increase revenue is to improve the economy.

We all know, however, that revenue booms like this don’t last. Chris Edwards suggests here that we take a lesson from the last boom cycle.
“During the revenue boom of the 1990s, states allowed their budgets to bloat as they expanded programs such as Medicaid to unsustainable levels. When the recession hit in 2001 and revenues stagnated, state officials moaned that they were innocent victims of a fiscal crisis. They responded by hiking taxes and clamoring for more aid from Washington.”
Are we really so unwise as to repeat this debacle? Apparently we are because we have a strong track record of repeating it. Every time we have an excess of revenue, it seems that many people can only see the endless possibilities for feeding it to an endlessly hungry bureaucracy. Our legislators and lobbyists are drawn to spend it like moths are fatally drawn to a light.

Proponents of spending the overcharge demagogue tax refund advocates as Santa Clauses that want to give away “government” money to the unworthy taxpayers when much greater “needs” exist. Never mind the fact that they only want to return the excess to its rightful owners. We would all freak out if a business refused to return even $1 they overcharged us, even if we were shareholders in the business. Why do we have such a different attitude when it comes to government? Chris Edwards discusses why this makes for bad policy.
“Otherwise sensible policymakers … apparently think that there is no harm in allowing spending to rise rapidly during booms, as long as tax rates aren’t increased. That is not correct: Every dollar used for budget expansion is a dollar sucked out of the private economy and not available for investment and job creation.”
Edwards decries using surpluses to fund tax decrease gimmicks that target special interest groups rather than actually reducing tax rates, which spurs economic growth. Then he mentions Utah. “Gov. Jon Huntsman of Utah is an exception: He is calling for a cut to the state’s top income-tax rate to "send a signal about our commitment to long-term competitiveness."”

Bully for Gov. Huntsman. But is his suggested policy being carried forward on Capitol Hill? There is a lot of squabbling over this at the moment. And there is a lot of disagreement about how stingy government should be when it comes to cutting taxes.

Edwards argues that one of the best ways to cut taxes is to decrease or repeal anti-competitive taxes that have a punitive effect on growth, produce little revenue, and are costly to administer. This message surely won’t set well with the anti-“big business” and anti-globalization crowd.

Finally, Edwards forecasts the economic futures of states that spend their budget surpluses and those that enact meaningful tax cuts. “If states continue using today’s surpluses to expand budgets they will set themselves up for a California-style budget crisis when the economy slows.” In contrast, states that reduce tax rates “will increase competitiveness, spur growth, and keep their budgets in the black when the next slowdown hits.”

This all reminds me of Aesop’s fable, the Ant and the Grassopper. Which will Utah be this year? Will we be the prudent ant and properly prepare for the bust at the end of the boom, or will we be the spendthrift grasshopper and spend the surplus without regard for the inevitable bust? Many of our legislators are trying to straddle the fence and do both things at once. Keep your eyes on the legislature to see which path we end up taking.


Anonymous said...

The whole situation drives me nuts. What we were spending three years ago was just fine, but now we find tax receipts taking off and now what was enough 3 years ago just simply won't do anymore. I don't understand it. I can understand a little extra spending to build up infrastructure(roads, schools, prisons, courthouses, etc.) to account for growth but massively increasing baseline spending is insane. Just as the article pointed out we merely need observe the mess that California is to make this case.

Anonymous said...

I'd like to get something back. I'd like to see government shrink rather than grow.

Yet, I'm still not convinced public education is being funded adequately. (See an article I wrote last year detailing increased costs without comparable increases in funding.)

My desire for improved public education is greater than my desire for a refund.

Scott Hinrichs said...

I'm with Mark. Tom, I fear you've fallen into the more-money-is-better trap. Your article, while true, does not address the real problems with our education system. In inflation-adjusted dollars, we spend over 400% more for public education today than we did 45 years ago, but our outcomes are much worse than they were 45 years ago.

Almost everything that we pay money for costs less in inflation-adjusted dollars than it did 45 years ago ... except for governmet programs. Why is that? While the cost of education has recently increased even as funding has fallen, the problem is that we are spending a lot of that money on the WRONG THINGS, not that there isn't enough money.

Merely increasing funding without fixing the base problems only perpetuates and grows the problems. It also does nothing to address the problem I noted in my article -- that the current boom cycle will end and we should prudently prepare for that time, rather than merely chucking more money into programs that in the minds of some will be perpetually under funded.