Limited Taxation & Government
18 Tremont Street #608    Boston, Massachusetts   02108     (617) 248-0022
E-Mail:       Web-page:

Boston Sunday Herald
June 14, 1998


Surplus signals a minus
By David C. Tuerck

Extra funds mean gov't shirked duty

Newspaper headlines recently declared that Massachusetts will end fiscal 1998 with a surplus of about $1 billion. Policy-makers and opinion leaders are celebrating this news as if it were manna from heaver -- 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 $1 billion 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 would be as much angst over the big surpluses as there is over big deficits. There isn't, however. This is because the tendency to view government 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 percent. 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 percent and unearned income (interests and dividends) at 12 percent. Cutting both tax rates to 5 percent 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, where he also serves as chairman and professor of economics.

Return to CLT&G homepage