Thursday, October 9, 2008

The state budget is in trouble

The State budget is in trouble and that means you and I are in trouble. Are you going to re-elect the same people who got us in trouble or will you elect individuals who will be fiscally responsible with our money. Your 401K is down, can you afford an income tax? An income tax will serve school employees and State employees but it will not serve you. State employees are guaranteed, their pensions. The only one who can look out for you and your family is you. Vote wisely.


The following cartoon appeared in the Seattle Post-Intelligencer and can be found in a number of other places as well.

The following piece appeared in the Union Leader.

The state budget is in trouble

If politicians are to be believed, the state is running both a surplus and a deficit at the same time. In the same week, Gov. John Lynch asked his department heads to cut millions of dollars from the budget, and the Senate president said on the radio that we're running a surplus. They can't both be right, can they? Well, actually they are, which is a good symbol of how difficult the budget is to understand.

The current two-year budget has a problem, but some of its individual components are fine. The first half of the budget turned out OK, but the second half is a disaster.

Overly optimistic revenue estimates created a large deficit. At the time, Republican revenue expert Rep. Norm Major warned that the revenue estimates used to balance this spending were at least $100 million too high. He was dismissed as a pessimist. Interestingly, time has proved him to be something of an optimist. First-year revenues ended up $71 million below budget projections. Second-year revenues are on track to be more than $200 million below projections.

So the budget problem is a tale of two years. The problem in the first year is much smaller, with most of the pain delayed until the second year. In addition, we started the budget with $61 million that should have been put in the state's savings account, the rainy day fund, but was kept available as a cushion in the budget.

Because we start the budget cycle with the cushion, the first budget year, which ended in June, ends up looking pretty good. Between the $61 million extra and some modest spending cuts, the state was able to spend $44 million more than it raised, leaving what counts as a surplus under state rules of about $17 million. So, fiscal year 2008 had a $44 million deficit, but because we had extra money for a cushion, it counts as a surplus.

For the 2008-2009 fiscal year, the one we're currently in, the situation is much worse. First, the budget called for spending $12 million more than it hoped to raise. Second, revenues are on track to be at least an additional $200 million below what the budget expected and needed. The governor had proposed $30 million of cuts and an additional $40 million of bonding to erase the deficit. He'll need to find an additional $140 million to $160 million.

The obvious place to turn is to the massive spending increase that had been described as mandatory. The budget increased general funding spending over the previous two-year budget by 17.5 percent, the largest spending increase in the last 20 years. Supporters of the budget agree that the increase was that high but insist that much of it was nondiscretionary spending. They say they could control only a little more than 3 percent a year, or 7 percent of the 17.5 percent two-year increase.

Yet every budget of the last 20 years faced similar decisions. If spending goes up here, something has to give there. Each of the previous budgets for two decades and six different governors made those decisions and came in with a smaller spending increase. Clearly the increases were never mandatory, as the governor is asking his department heads to cut those very same expenditures.

As bad as the current budget problem is, it looks easy compared to the next budget due after the election. Because each budget builds on the spending and revenue of the one that went before it, problems tend to grow exponentially. Weak revenue growth and an uncertain economy mean money will not be available to sustain normal levels of spending growth.

Next year, if spending were to grow at historical rates, likely revenues would be at least $500 million short. In an election cycle, politicians are most responsive to the people they hope will elect them. Each candidate should be asked if he or she will consider or rule out an income tax. In addition, candidates should be asked whether they would consider increasing other taxes or look to balance the budget during difficult economic times without any tax increases.

We know today that the problem will be as large as it has ever been. Some politicians will want to avoid all tax increases during difficult times. Others will rule out an income or sales tax but be open to other tax increases. Others, concerned about cutting spending levels, will want to consider an income tax. We need to know today what approach our would-be leaders will take. There's no need for a post-election surprise.

Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord.

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