Cut
taxes, balance the budget
Newspaper
headlines recently declared that Massachusetts will end fiscal
98 with a surplus of about $1 billion. Policy makers and opinion
leaders are celebrating this news as if it were manna from
heaven – a windfall as we head into election season.
Some suggest we return part of it to taxpayers and use the
rest for capital projects, road repairs and the rainy day
fund. Others say we should return the whole amount to taxpayers.
There
is a bigger issue. Suppose Massachusetts were ending the fiscal
year with a billion-dollar deficit. Would we be thinking only
about how to raise the missing $1 billion? Or would we also
be shaking our heads over how the state managed to get itself
into such a fix in the first place?
There
should be as much angst over big surpluses as there is over
big deficits. There isn't, however. This is because there
is a tendency to view government finance and business finance
as based on similar principles. In business, deficits (losses)
are a sign of failure and surpluses (profits) a sign of success.
The
same is not true of government. The goal of government is
not to make a surplus but to determine how much to tax and
spend. When a business makes a profit, it is because it held
down costs and sold a good product. When government runs a
surplus it is because it mistakenly took money that, by its
own reckoning, would have been better left in taxpayers' pockets.
Because
expenditures and revenues depend in part on the economy and
other circumstances not directly controlled by government,
it is not possible to balance government budgets exactly.
But the goal is to come as close as possible, avoiding large,
persistent surpluses as well as large, persistent deficits.
Let's
suppose that the Massachusetts legislature passes a budget
that funds $19 billion in programs for the forthcoming fiscal
year. By doing so, it makes a decision that the funded government
programs are more valuable than (1) what taxpayers themselves
would use the money for and (2) other government programs
that might have been funded instead. There is no profit motive
at work here. The Legislature simply makes tradeoffs, for
which it is – or should be – held politically and
financially accountable.
If
the state budgets $19 billion in spending for the forthcoming
fiscal year but ends up collecting $20 billion in revenue,
it has collected $1 billion too much. If it keeps that extra
$1 billion (to fund new or special needs) then it misrepresented
its needs in the original budget. On the other hand, if it
didn't intend to collect the extra $1 billion, then it should
return that amount, with interest, to the taxpayers.
Otherwise,
government is guilty of a double standard. If a taxpayer reveals
on April 15 that he has underpaid his taxes, he is liable
for a penalty. If, on the other hand, the state government
reveals at the end of the fiscal year that it has overcharged
taxpayers, it doesn't have to pay back one cent as long as
it can spend the money on some project or stash it in some
fund.
Such
surplus spending is an exercise in fiscal irresponsibility.
It entails the expenditure by government of money that it
should never have collected in the first place.
Massachusetts
has run a surplus every year since 1992. What we see
when looking at the period 1992-98 is a tendency for the state
to underestimate substantially, in each year's budget, the
revenues that it actually brings in during the forthcoming
year. When actual revenues substantially exceed budgeted revenues,
they become available as a “surplus” to pay for
end-of-the year pet projects.
Over
the period 1992-98, actual Massachusetts revenues have exceeded
budgeted revenues by an average of 7%. In terms of 1998 revenues,
that's about $1.356 billion.
This
means one of two things: Either the state has decided to hide
a billion dollars in planned spending at budget time or it
is doing what might charitably be called a poor job of forecasting.
In either case, it is time for taxpayers to put a halt to
what's going on.
The
most effective way to do so would be to limit the growth of
tax revenues. The state currently taxes earned income at 5.95%
and unearned income (interests and dividends) at 12%. Cutting
both tax rates to 5% over a three-year period would move the
budget out of surplus and into balance through 2003.
Besides
providing five years of relief from surplus spending, this
plan would offer an economic bonus. By alleviating the drag
imposed by overly high tax rates, it would stimulate a mini
economic boom, leading to the creation of more than 100,000
new jobs and of more than $20 billion in new private capital.
The
final annual revenue cost would be about $1.760 billion or
only about $278 million more than enough to wipe out the surplus
we could expect to materialize if current trends continue.
As long as the state limited spending growth, any resulting
deficits would be small and temporary.
A
number of policy makers and commentators, professing fear
of future deficits, recommend smaller, slower tax cuts or
tax cuts that would be contingent on the performance of the
economy.
The
trouble with this advice is that it ignores the lessons of
the past. For years the state has told us that it needs far
less revenue than it has actually spent or squirreled away.
If Massachusetts budget makers consistently tell us that they
can live on far less than we send them in revenue every year,
who, after all, are we to argue with them?
Government
should live within its means. It should not, however, be allowed
to live on however much it is able, through good fortune and
creative money shuffling, to collect. Let's take our political
leaders at their word and make them live on what they keep
telling us they need.
David
G. Tuerck is the executive director of the Beacon Hill Institute
at Suffolk University. This article appeared first in the
Boston Sunday Herald on June 14, 1998.
It then appeared in Mass High Tech (June 29- July 5), The
Middleex News on July 9, 1998 and The North Adams (MA) Transcript
on July 14.
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