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Legislators with surplus cash will create new expenditures

Opinion

By David G. Tuerck
Executive Director, BHI

Like any other entity subject to financial controls, the state should pay each year's bills out of that year's revenues.

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 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 for worry.

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 midsummer 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 a 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 include 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-back 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 control."

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 collect.

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 percent to 5.00 percent by the year 2001. If the signature drive is successful, state voters may have their first opportunity in eight years to enact a major, across-the-board tax rollback.

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 higher wages.

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 last fiscal year.

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 for them.

David Tuerck is Executive Director of the Beacon Hill Institute at Suffolk University in Boston where he also serves as Chairman and Professor of Economics.

This article first appeared in the Worcester Telegram & Gazette on October 14, 1997.

Format revised on 18 August, 2004