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Budget surplus is no bargain for taxpayers |
from NewsLink, Vol. 2, No. 2, Spring 1998
Recently, newspaper headlines have declared that Massachusetts will end FY 98 with a surplus of about $1 billion. Theories abound as to what to do with this money. Some suggest that we return $350 million 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 wondering how to raise the missing $1 billion? Or would we also be shaking our heads over how the state managed to get itself into that fix?
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, was 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 exactly possible to balance government budgets. 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. It perforce 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 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 the budget as it was framed had no real meaning. If, however, 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 substantially to underestimate, 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%. In terms of 1998 revenues, that's about $1.356 billion.
This means one of two things: Either the state has decided as a matter of policy to wait until late August to decide how to spend a billion dollars of the preceding year's money or it is not doing a good job at forecasting. In either case, it is appropriate to constrain the state's access to tax revenue.
The most effective constraint would be to limit the growth of tax revenues. The state currently taxes earned income at 5.95% and unearned income at 12%. BHI has proposed cutting both tax rates to 5% over a three-year period, thus effectively moving the budget out of surplus and into balance through 2003.
Besides providing five years of relief from surplus spending, our plan would offer an economic bonus. By alleviating the drag imposed by overly high tax rates, Massachusetts 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 by 2003.
The final revenue cost would be about $1.760 billion or about $278 million, more than enough to wipe out the expected surplus if current trends continue. The state could pay for the resulting small, temporary deficits that would result and be back to running substantial surpluses by 2003.
Opponents of steep tax cuts point to the possibility of future deficits as a reason to keep taxes high. But this symptomizes the same one-sided approach to fiscal policy that got us where we are now. The goal, we must remind ourselves, is a balanced budget, not a billion-dollar-a-year tax grab.
NewsLink is the quarterly newsletter of the Beacon Hill Institute for Public Policy Research at Suffolk University. © 1996-2000. All rights reserved.
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