If you’re a governor or state legislator, there’s a 50-50 chance you have some tough choices ahead. That’s because roughly half of all states currently face budget shortfalls because of lower than expected revenues, excessive government spending, or a combination of the two.
Most experts agree that the recent economic downturn began in the fourth quarter of last year and isn’t likely to let up anytime soon. Exacerbating concerns among state lawmakers is that we haven’t technically entered into a recession yet – it first takes two consecutive quarters of negative growth.
Although there is no “one-size-fits-all” solution for what ails government finance, each state would be wise to learn from the challenges its peers face.
In California, where the state’s deficit has grown to a staggering $16 billion, Gov. Arnold Schwarzenegger is proposing a 10 percent across-the-board budget cut for all state agencies. This initiative is being met with fierce contention on all sides as opponents fear a resulting implosion of government services.
Plans are already underway by Florida legislators to begin tapping the state’s “rainy-day” fund to cover a portion of its $3 billion shortage for the current fiscal year- the worst in the state’s history.
Wrestling a perpetually dismal economy, Gov. Jennifer Granholm of Michigan raised taxes last year to their highest level in a generation and faces another bleak economic forecast for the upcoming fiscal year. Yet in spite of the governor’s promise to avoid additional tax increases, some Michigan lawmakers are unsure of how else the state will cover the anticipated $500 million gap.
California, Michigan, Florida and many other states undoubtedly face a difficult road of comprehensive spending reform, budget cuts, and possible tax increases. However, by focusing exclusively on short-term solutions to current fiscal issues, we can easily overlook a great opportunity to renew our long-term commitment for responsible government.
Too often in state government, moments of economic prosperity translate into outrageous public spending, duplicative government programs, and taxpayer-funded initiatives that benefit only a small group. While states like Texas should be commended for holding their expenditures near a population growth plus inflation threshold, too many states spend money well beyond their means.
All too often, it takes cutbacks to force government to re-prioritize its core functions and correct its indulgences.
A budget shortfall is a painful but helpful reminder that government has a limited amount of resources at its disposal and must work within the boundaries of those economic constraints. Failure to stay within these boundaries causes taxpayers to lose confidence in their elected officials.
One governor who appears to understand this is New York’s David Paterson, who told an audience of business leaders on April 8th that the budget plan he inherited was “too big and too bloated” and that he will recommend spending cuts of between 5 and 10 percent.
“What I want you to understand is that this is not a new governor responding to an economic crisis,” Paterson said. “This is a new governor trying to create fiscal reality in the minds of those who are in decision-making capacities in this state.”
Aside from responsibly reducing expenditures, state and local revenue shortages are best absorbed with a relatively stable tax system. Despite critics who long for an income tax in Texas, the state’s sales tax has historically proven to be a reliable source of revenue with reasonable growth that reflects the state’s economy overall. From February 2007 to February 2008, state sales tax collections rose for 12 consecutive months, reflecting the strength of the Texas economy over that period.
Aggressively counteracting a budget shortage by making reductions in spending, eliminating or consolidating government programs, streamlining the bureaucracy through e-government initiatives, and creating a tax environment that encourages private sector investment can provide tremendous long-term benefits to government at all levels.
The long-term impact of implementing policy changes aimed at controlling government spending and helping citizens keep more of their own money will help make our economy more vibrant than ever.
The Honorable Talmadge Heflin is Director of the Center for Fiscal Policy at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. Heflin served 11 terms in the Texas House of Representatives and is a former chairman of the House Appropriations Committee.