Papering over shortfalls with the "Future Tax"

Bob Collins debunks the notion that families are paragons of budgeting virtue, while governments are drunken sailors. (He's not the only one).

In fact, Collins shows, families and governments both tend to employ the tactic of "living in a sea of red ink in the long run, with the hope that the money will appear."

13.9 percent of a family's income goes toward servicing their credit card debt, according to creditcards.com. And more than 1 out of 10 households have more debt than total income. And that's just credit card debt.

State and local governments are required to balance their budgets, and borrowing is more limited than with families or the feds. So faced with the choices of cutting programs and/or raising taxes, states choose Door Number Three: Short-term accounting gymnastics and other one-time solutions that amount to nothing more than a "Future Tax," because the bills eventually will become due, while the punted problems compound.

Minnpost has a good summary how Minnesota has gradually dug itself in a deeper hole since 2001. Last year, Gov. Tim Pawlenty used one-time solutions to close 41 percent of the state's budget gap. Only oil-rich Alaska did more temporary patching. What's worse, 

Minnesota faces a structural budget imbalance of $5.4 billion, not counting general inflation. In other words, the state has a chronic shortage of funds to meet obligations that have remained in place through several rounds of one-time fixes in which the decision makers have neither raised taxes nor formally cut the programs tied to those obligations.

Jeff Van Wychen at MN2020 puts the consequences for Minnesota in broader perspective, showing how

Minnesota's state and local government revenues and expenditures have declined significantly in comparison to other states. The corresponding decline in public investment has coincided with a decline in Minnesota's economic performance and quality of life. 

[...]

Of course, correlation does not equal causation. However, competing explanations do not explain the full extent to which Minnesota's economic performance has deteriorated since 2002. The trends highlighted in this report leave "no new tax" proponents with a difficult question to answer: why did the reduction in the size of government in Minnesota not produce the relative improvement in Minnesota's economic performance that was predicted? To this point, the economic experiment undertaken by the advocates of "less government" and "no new taxes" has been a failure.

Proponents of sustained public investment have long argued that the failure to maintain critical public investments would lead to deterioration in Minnesota's economic performance relative to the national average. This is precisely what has occurred.

In light of these realities, most states are being forced to reassess their Future Tax strategies.

For instance, Colorado is now bumping up against the limits of its experiments with tax cuts and spending ceilings. Its practice of handing out business tax credits to spur economic development has resulted in 80 percent of the state being included in some type of special enterprise zone.

Will Minnesota taxpayers finally demand both parties call No Tax a Future Tax? Or, accustomed to betting the farm that tomorrow will be better, will we go out and buy the flat screen today?

— Charlie Quimby, cross-posted from Across the Great Divide

Comments

[Craig Westover]

Charlie --

As usual, there is just enough truth in what you write to make it credible, but wrong. To a degree that is understandable. You accurately recount the "no new taxes" position as its supporters portray it, but they don't understand the problem and the economics much better than the left does.

So, let's address your question: Why did the reduction in the size of government in Minnesota not produce the relative improvement in Minnesota's economic performance that was predicted?

First government did not decrease in size. To get to that conclusion, you are defining "size" as a percentage relative to state economic activity. In dollars, which is how things are paid for, government grew. More importantly, however, the scope of government increased. It is the scope of government that has the most effect on economic development -- every time government extends its scope of taxation and regulation it creates activities at the margins that are unproductive. People stop producing and put effort into minimizing the impact of the regulation or tax.

That brings us to a second point. You will get no argument that Minnesota has probably not made infrastructure investment that it should. You, however, would attribute that lack of investment entirely to failure to increase taxes; I would argue as above that the state's failure to fulfill its constitutional obligations is more so the direct result of its expanded scope diluting both resources and attention that ought to be paid to those obligations.

A point about 80 percent of Colorado included in some type of enterprise zone. That is precisely the problem. If you want to attract new business to the state you don't do it by showing preference to geography through JOBZ-like programs or by targeting favored industries through "green" jobs. You do it by creating a level playing field for all businesses across the state. You do it by not constantly threatening to change the rules for business. You do it by being market friendly, not business friendly.

The last point is that all taxes are not created equal. Taxes on productivity -- corporate taxes and individual income taxes are highly inefficient and hit low-income wage earns hardest in the form of higher prices and lower wages in the case of corporate taxes. In the case of income taxes, in order to lure mobile high-wage earners to Minnesota employers must offer them higher gross wages to compensate for high tax rates -- which widens, not narrows the wage gap between rich and poor.

I often note that the problem conservatives have is that they tend to think just because the left has bad solutions to problems that there are no problems. The corollary for the left is just because the right doesn't understand the problem doesn't make the left's solution right.

The answer to the tax the rich/no new taxes debate is not some magical balance. The answer is returning government to its limited role, focus it on its constitutional obligations, debate what "fully funding" those constitutional obligations means, reduce with intent to eliminate extra-constitutional spending, reform the tax code so it is based on economic principles and minimizes marginal distortions and then and only then can we realistically talk about necessary levels of revenue required for government to work.

[Charlie Quimby]

Craig,

1. Just as government grew by your measure, so did the economy. So did inflation, population served and the cost of goods and services. That's why measuring size of government in relation to size of the economy makes sense and why that measurement tells us something absolute dollar growth doesn't.

2. I agree with your point on the effects of uncertainty about regulation on business. It is one of many uncertainties business faces, and it seems to be the one business can eliminate if it spends enough money in the right places. Change and uncertainty in the scope of government reflects shrinking as well as growing its influence. It also reflects the public's dissatisfaction when economic interests run roughshod and unrestrained. In some principled, constitutional wax world, all these inconveniences might be eliminated, and economic interests might make it a wonderful place, but I don't see it happening in this world.

3. I included the Colorado example because it is an absurd consequence of misguided policy. We agree on this point, but perhaps you are so used to me being credible but wrong that you missed it.

4. My agreeing with half of what you say, of course, achieves only half the nonnegotiable magical balance that gives libertarians everything they want.

[Craig Westover]

Points considered --

1) Your explanation doesn't get to the essential point that government shouldn't be growing services as the economy grows. Government will grow with population and may grow to accommodate new developments in established areas of authority, but it does not expand its scope of authority or service simply because more revenue is available. Government is constitutionally limited in how much service it provides.

2)The point here is market influences can be anticipated and the more effective businesses will do that and survive and prosper -- make the best use of resources. This includes reading public sentiment vis-a-vis corporate activities. Good example -- many bars were already putting in air filters and creating smoke-free rooms to accommodate non-smoking customers while others were catering to smokers, a market niche. The market was working, sorting out what the public wanted. Smoking ban legislation changed that overnight. It denied business the right to cater to smokers and obviated the investment others had made to cultivate the non-smoking market. It took away their competitive advantage. It's the arbitrariness of government intervention that is the problem.

3)We agree, but I'm not sure we agree on the misguided policy. I'm assuming you think the misguided policy is the patchwork of tax breaks. I see that as a consequence of the misguided overall tax policy that leads to the patchwork of tax breaks. The root cause is an inefficient unfriendly-to-the-market tax system; the tax zones are a consequence.

4)Understand that libertarians don't "want" in the same sense as liberals. Liberals (and conservatives acting like liberals)"want" specific end results and create policy to achieve those specific end results (no smoking in bars). Libertarians may "want" a specific end (I like smoke-free bars when I'm eating), but the process (principle) of a free-market is more important and they are not willing to sacrifice that principle to achieve their individual, specific end.

The essence of libertarianism is that a libertarian is not required to support or believe in everything a "libertarian" society might allow.