Sunday, Aug. 17, 2008

Midyear cuts demonstrate need for (fill in your favorite fiscal cause)

THE MONEY men in Columbia were playing “Don’t let the facts get in the way of a good political argument” last week, against the backdrop of the Budget and Control Board slashing state agency budgets, only to be told the next day that they really didn’t need to.

On one side was Gov. Mark Sanford, declaring that the expected shortfall that prompted the 3 percent across-the-board cut was the result of the Legislature “growing government” too fast. Even after the Board of Economic Advisors declared the next day that tax collections are not falling off as much as the budget board had expected, the governor fired off a news release declaring that this non-action underscored the need for the Legislature to come back to town and deal with the shortfall. (That’s the shortfall that the BEA just said doesn’t exist.)

Across the table were the Legislature’s top budget writers, Sen. Hugh Leatherman and Rep. Dan Cooper, who continued to point out that the shortfall in the fiscal year that just ended was almost identical to the tax cut package that they had ushered into law a year ago, right before they started attacking it as the source of all our woes.

Great rhetoric, no matter which side you’re on. Proof that the Legislature is spending too much money — and innocent children will suffer as a result. Proof that tax cuts are undermining our state — and innocent children will suffer as a result.

Of course, the budget shortfall proves neither.

A midyear budget shortfall occurs for a very simple reason: The revenue projection used to write the budget was too optimistic. It doesn’t matter whether the projection was for a 20 percent increase, and revenue increased just 19 percent, or for a 5 percent reduction, and revenue fell 6 percent. The problem is that the revenue projected was more than the revenue collected.

Now, before we join Mr. Sanford in blaming the Economic Advisors for overestimating revenue enough to make the budget board tap a reserve fund last week — and for not predicting that shortfall that the budget board is certain they will predict eventually — it’s worth noting that they weren’t alone in their irrational exuberance. The Post and Courier of Charleston reports that a BEA survey found that seven of nine Southeastern states overestimated revenues — and therefore overspent — during the fiscal year just ended. Revenue was 12 percent short in Florida, just 2.9 percent here.

This is not to say that the actions cited by the governor and his critics don’t affect what happens in an economic slowdown.

Using one-time money to “grow government” — that is, to expand day-to-day operations — can have painful consequences. As we saw at the turn of the century, when one-time money dries up, the agencies that rely on it have to do without it the following year. That could very well happen next year, although fortunately the current budget doesn’t rely nearly as much on one-time money as earlier ones did.

But the idea that using all the revenue that results from a rapidly expanding economy to “grow government” will cause problems in a slowing economy is mostly fantasy; an economic slowdown simply means spending won’t increase as fast. It’s true that lawmakers could offset a midyear shortfall by, say, putting an extra $200 million into one of the state’s rainy-day funds rather than using it to pay teachers or prison guards or troopers. But while the governor would have accepted this, what he really wanted legislators to do was cut taxes, which would have left our budget in precisely the same shape it’s in right now.

Cutting taxes does have painful consequences: There is less money to buy gas for school buses, to pay prison guards, to do everything government needs to do. We saw that this spring, as legislators wrote a budget without $221 million that income and grocery sales taxes would have generated if they hadn’t been cut.

But if those taxes had not been cut, the budget forecast would have been $221 million higher than it was, lawmakers would have spent that additional $221 million (one hopes on gas, teachers, guards and all those things government needs to do — but one does not hold her breath, lest she pass out), and, again, the budget would be in precisely the same shape it’s in right now.

You see, tax cuts and spending caps are not the answer to every fiscal problem. Neither are they the cause of every problem.

The one politician who made a legitimate pitch for his pet cause was Jim Rex, who said the midyear cut emphasized the need for comprehensive tax and funding reform. The education superintendent noted that our tax system makes it difficult for school districts to make up state cuts, because it limits their ability to increase property taxes.

True enough, but he left out the more important element at play. South Carolina relies far too heavily on the notoriously volatile sales tax; to make matters worse, we have exempted out many of the least volatile items — groceries, gasoline, prescription drugs and of course services, which are consumed primarily by the better-off. So tax revenue falls off more in a downturn than it would in a more balanced system.

Overall tax collections would be slowing now no matter what our mix of taxes, but if we relied less on the sales tax, and if that tax were not shot through with every exemption you could think of, the slow-down would be more gradual — and easier to predict. The only person talking about that last week was John Rainey, who as chairman of the Board of Economic Advisors is supposed to be our state’s expert on tax and fiscal policy — which is probably not a coincidence.

Ms. Scoppe can be reached at cscoppe@thestate.com or at (803) 771-8571.