Categorized | 2002 Enterprise Articles



RECIPE FOR TAX HIKES- DEAL WITH BUDGET SHORTFALLS BY BORROWING AND SPENDING RESERVES

howardnlby Howard Stephenson

The Utah Legislature once again pulled a rabbit out of the budget-balancing hat through borrowing and spending one-time money. Rather than serious spending cuts, borrowing and use of reserves have been the favorite tools to address revenue shortfalls since the Legislature began grappling with red ink last January.
In dealing with the most recent $117 million budget hole in a one-day special session called by Governor Leavitt for December 18, $70.3 million of the problem was handled through use of one-time money and more borrowing. Of the $46 million in ongoing spending cuts, only $21.5 million was actual cuts, the remainder was temporary delays in spending.
As a State Senator I argued that borrowing and one-time reserves are tools that should only be used at the end of a budget year, when spending cuts are not possible because the budget year is used up. To use those things mid year instead of meaningful spending reductions, leaves no other option but to increase taxes if red ink persists through the rest of the budget year, which ends June 30, 2003. I asked, “What do we do if there’s another $100 million shortfall in June, if we’ve spent our reserves and done our borrowing mid-year?” I likened the legislature’s actions to Utah’s bankruptcy-prone families who rely more and more on credit cards instead of cuts in the family budget.
It should be of concern to Utahns to know that Utah state general obligation debt per capita has grown 250% during the past ten years, from $180 per person in 1992 to $633 per person in 2002. Much of this increased debt is for the reconstruction of I-15. The recent borrowing to balance budgets would increase this figure even higher.
Governor Leavitt has expressed concern about the size of the cuts the legislature has made. I too am concerned about the size of the cuts, for a different reason – that the actual cuts are too small. It’s not that spending has been tight during the Leavitt years. Utah total state spending of $3.75 billion in 1992 has grown to $7.02 billion for 2003, after the recent budget cuts.
State Treasurer Ed Alter has warned that Utah’s current trends in budget balancing may lead to erosion of our coveted triple-A bond rating. He said we can’t keep borrowing and spending one-time money to balance budgets.
According to the National Conference of State Legislatures, three-fourths of the fifty states have also dipped into reserves, highway funds, tobacco funds, and rainy-day funds to balance budgets. But just because everyone else is doing it doesn’t make it right.
Last January during the first phase of budget cuts Governor Leavitt and many others insisted that the Legislature use the rainy-day funds mid-year in January, and thereby reduce the need to cut spending. Fortunately for taxpayers, the Legislature held firm and left significant reserves in place in case the economic downturn continued into May and June of 2002 — which it did.
In the 2002 budget crisis, because the cuts came near the end of the fiscal year, the legislature was able to cut spending by only $105 million in addressing a nearly $400 million shortfall. The rest came mainly from reserves and bonding to free up cash for capital projects. But those were the options available at the end of a budget year.
The wisdom shown by the legislature in handling the $400 million budget cuts for FY 2002 was absolutely lost last July in dealing with the 2003 budget reductions of $173 million. Just as before, the Governor and leaders of the teachers union insisted that reserves be used to mitigate the size of spending cuts. This time the legislature initially held firm, but finally gave in and agreed to use most of the reserves. Legislative leadership’s original plan was to solve the $173 million problem with $103 million in budget cuts and the use of $70 million in reserves and cash for capital projects. By the time they were through, spending cuts amounted to just $73 million.

As described in the opening paragraphs of this column, the Legislature has continued to make similar mistakes which, if the economy doesn’t turn around soon, could spell disaster for taxpayers.
The Governor and Legislature broke a cardinal rule of budgeting in making the 2003 budget cuts last July and again on December 18. The rule is that reserves are what you use at the end of a budget cycle, when you have no other choices, not at the beginning of the budget year. That is, unless you’re intentionally setting yourself up for a tax increase later in the year.

Because the governor and legislature violated this rule, the options are now seriously narrowed if the revenue picture continues to worsen. Taxes may be raised. There are already proposals for a gas tax hike (Utah gas tax revenues per $1,000 of personal income already rank 7th highest in the nation), elimination of dependent exemptions on Utah’s individual income taxes, and various new levies on Utah businesses.

Tax hikes are the worst thing lawmakers could do during an economic downturn. A state whose taxes and fees already rank 9th highest in the nation may find that tax hikes actually reduce revenue by stifling economic activity.



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