Call it the end-of-summer
spending spree. With our attention on Labor Day and the death of
Princess Diana, we failed to notice that the state had spent or
stashed away millions of our tax dollars in a way that would have
embarrassed Imelda Marcos.
How did this happen? Like most
businesses and households, Massachusetts has a budget, the purpose
of which is to set spending priorities and limit spending overall.
But when the state projects its budget for a particular fiscal year,
it can only guess how much it will collect in taxes during that
year. If, as has been the case in recent years, the state collects
more in taxes than it budgets for spending, it faces the problem of
what to do with the surplus tax dollars.
Since those surplus dollars come
from the taxpayers to begin with, we might think we’d be in store
for a refund of all or at least part of the surplus. Not necessarily
so. Massachusetts doesn’t have to return the money. There are a
lot of places where it can stash windfall tax revenue.
One place is the state’s
stabilization, or "rainy-day," fund. The state puts money
in this fund in case future revenues fall short of expectations. In
and of itself, the existence of a rainy-day fund needn’t be cause
Indeed, the state should put some money aside for a rainy day.
Assuming there is a reasonable cap on the amount of revenue allowed
to flow into the rainy-day fund, we could still look forward to a
tax refund when surplus revenues are large enough.
The current cap on the rainy-day
fund is $890 million.
Early this year, the fund was up
to $565 million. An additional $325 million would fill it.
State officials knew by mid-summer
that Massachusetts had collected a lot more in tax revenue than it
had budgeted for expenditure in the 1997 fiscal year, which ended on
June 30. That amount, still to be determined in the final closing of
the books, will be between $700 million and $800 million.
When you have at least $700
million in revenue and a rainy-day fund that will hold only $325
million more, what do you do? A taxpayer refund is one option.
Another option is to practice creative budgeting. Find other uses
for the funds.
The state developed a laundry list
of other uses. The Legislature passed and the governor signed a bill
allocating about $117 million to pay for "deficiency"
items that included unpaid and unexpected bills from last fiscal
year, as well as some new outlays for the current fiscal year. Then
it took another $378 million and applied it to various funds and
capital projects begging for attention. Finally, it deposited $230
million into the rainy-day fund, thus using up $725 million in
surplus revenue without any give-backs to the taxpayers.
The list of end-of-the-year
projects makes interesting reading. You might not know, for example,
that the state’s 1997 revenue windfall made it possible to put $20
million into the "water pollution abatement trust" and to
use $128 million for "caseload increase mitigation." You
may have missed the news that, thanks to your taxes, the state was
able to make an unbudgeted contribution of $13 million to "MDC
rinks and pools" and of $5 million to "dams and flood
Are these worthy uses of taxpayer
money? There is, no doubt, a case to be made for each one. But if
the state budget means anything, it should reflect spending plans
for the year to come. Like any other entity subject to financial
controls, the state should pay each year’s bills out of that
year’s revenue. It should pay for capital projects from the
capital budget, not the operating budget.
Otherwise, the budget becomes a
sham. Its purpose is to limit spending to those projects that are
deemed worthy of funds. But as the budget has come to work now, the
state expands spending to absorb all the funds it is able to
One way to put an end to this sham
is to deny the state access to some of the revenue it has been
collecting. The best way to do this is to cut taxes.
There is currently a signature
drive under way for an initiative on the November 1998 ballot to cut
the tax on earned income from 5.95 to 5 percent by the year 2001. If
the petition is successful, state voters may have their first
opportunity in eight years to enact a major, across-the-board tax
The state Legislature could render
this citizen initiative unnecessary by simply cutting taxes now.
According to an analysis performed at the Beacon Hill Institute, an
immediate reduction in the tax rate would produce about 96,000 new
jobs in Massachusetts and $13 billion in new capital spending that
could be used for new plants and equipment. Annual state payrolls
would rise by about $5.6 billion.
In other words, more jobs at
When the economic effects are
considered, the state would give up about $790 million in tax
revenues. This is, interestingly, within the range of estimates
being offered for the surplus revenues collected this past fiscal
If legislators cut taxes now
they’d avoid the temptation of future spending sprees. If they
wait, voters may seize the initiative and prune the state money tree
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.
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