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.
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