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
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
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
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.
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.