Legislature addresses imaginary ‘shortfall'
Band-aids are applied to prop up high spending
- Wednesday, December 10, 2008
As the debate over whether to increase taxes or scale back government spending rages on in Nevada, state lawmakers met this week to explore options for averting a supposed "shortfall" in the current biennial budget. All the while, legislators and media pundits decry the revisions being made in the budget and proclaim that tax rates must increase if the state is to provide an adequate level of services.
An obvious and glaring fallacy sits at the center of these claims. The "shortfall" that legislators have addressed is actually imaginary. Reality stubbornly defies claims that the state is experiencing a $1.5 billion budget shortfall that will force a 34 percent reduction in services if taxes are not raised. For big-government advocates, the inconvenient truth is this: Their numbers simply don't add up.
General Fund Revenue (Actual)
Source: NV Economic Forum Reports
According to data supplied by the Nevada Economic Forum – responsible for advising legislators and the governor of tax revenue projections – state tax revenues in the current biennium are only 6 percent lower than those of the previous biennium, while 63 percent higher than revenues in the 2001-2003 biennium. After the state legislature in 2003 passed the largest tax increase in the history of the state – producing a 44 percent revenue increase during the next biennium – state tax revenues have consistently remained at higher levels than ever before.
Claims about a budget "shortfall" that range up to 34 percent do not come from real life. Instead, they come from unrealistic Economic Forum projections that called for state tax revenues to perpetually increase at inordinate rates. On the heels of two biennia in which state tax collections increased by 43.9 and 20.5 percent, legislators set the budget for the current biennium with the expectation that state tax collections would increase by an additional 11.6 percent. Public outcry over a budget "shortfall" has been based on these unrealistic numbers and not on the practical observation that tax collections have been unusually high in the past few years. Apparently, government officials expected to be able to ride the rising taxation wave into eternity.
It would not have taken a global recession to eventually discover the folly of such expectations. The state's economy was not growing at rates that even approached these numbers – meaning that state government was consuming an increasingly larger share of income generated in the state. It would be absurd to presume that this trend was sustainable over the long term. The onset of recession has only helped to highlight this reality.
Growth in Gross State Product
Growth in U.S. GDP
Source: US Dept. of Commerce
Because Nevada state government lacks any constitutional spending limit protecting citizens, higher tax collections have translated into increased spending - with much of the increase coming through pay increases for government employees. The ruling class within government has consistently benefited while private individuals have been forced to submit to lower standards of living to support this trend. Even Gov. Jim Gibbons has acknowledged, "We worked to get everyone a 6 percent pay increase this biennium when a lot of companies in the private sector did not give employees any increases in salaries."
The legislature did nothing to address this trend in its recent special session. In fact, instead of addressing the problem of rising taxation and government spending, the legislature simply constructed a patchwork of loans, asset swaps and tax increases that will allow state government to continue on its wayward path. To compensate for the $341 million difference between what the state expects to receive over the remainder of this biennium and the amount that it had hoped to receive, the legislature agreed to:
- Borrow $160 million from local governments through the Local Government Pooled Investment Fund
- Seize $77 million from state accounts other than the General Fund
- Cut from the budget $73 million that was not employee pay but had been dedicated to the provision of services
- Collect in advance $28 million worth of future mining taxes
- Increase the amount of taxes on rental car companies
When crafting the budget for the next biennium, government officials would do well to recognize and address the systemic problems of rising taxes and government employee pay. Lawmakers should no longer make the mistake of planning to receive perpetually skyrocketing tax revenues. True reform should come by reining in spending on employee pay raises while allowing more resources to remain in the private sector where individuals are facing declining incomes and unemployment.
Tax dollars should be dedicated for the provision of essential services – not for enriching the ruling class.
Geoffrey Lawrence is fiscal policy analyst at the Nevada Policy Research Institute.