How Best to Tackle State Spending?

As we report in Reason’s Annual Privatization Report 2008 (see “State Budget Outlook”), FY 2009 is shaping up to be a challenging year for many states. NCSL’s most recent budget outlook found that budget gaps have emerged in 23 states (collectively exceeding $26 billion), with slowing or declining revenue from personal income, general sales and corporate income taxes the principal cause. A majority of statesââ?¬â??34 in allââ?¬â??are “concerned” about mounting budget pressures, a sluggish national economy and the increased problems generated by a possible recession. Officials in ten states expect their revenues to be “stable,” and four states (Arizona, Delaware, New York and Washington) report a “pessimistic” outlook for the future. Only three states (Alaska, North Dakota and Wyoming) are reporting an “optimistic” outlook these days; by way of comparison, that figure has hovered in the double digits in the last several years. In several states, we’ve seen proposals for (or implementation of) across-the-board cuts as a way to stop the bleeding. But is this smart? South Carolina Gov. Mark Sanford recently commented on why targeted cuts, not across-the-board cuts, are a preferable solution:

State government spending has grown more than 40 percent over the past four years ââ?¬â?? well ahead of the growth in South Carolina’s underlying economy and well ahead of the growth of people’s paychecks over the same time. Our disagreements on this level of spending and my warnings on that front have all been well chronicled over the past five years ââ?¬â?? and to a great degree represent water under the bridge. This doesn’t change the fact that spending growth has set us up to repeat the budget situation of the early 2000s, when during three years there were six rounds of budget cuts. In every instance, cuts were across the board because our political system has been designed to take the path of least resistance ââ?¬â?? generally not the one that leads to the best decisions, whether in our personal or business lives. I don’t think the path of least resistance and across-the-board cuts should be taken today, and here are a few reasons why: In our family budget we differentiate between what we commit to the mortgage and what we commit to buying tickets to the movies. With $3.50/gallon gas there are thousands of families across South Carolina making tough choices on where they spend their money. No one says, “We’ll just cut everything across the board by 3 percent,” because they know the mortgage is in a very different category than movies and popcorn. Businesses across our state do the same thing in setting priorities ââ?¬â?? why shouldn’t your state government? If one knows they are going to get credit for getting things, and that someone different gets the blame when things are taken away, then one will single-mindedly focus just on getting things. I’m not blaming a legislator for this, but just highlighting the unusual incentive system that exists for a legislator to focus on things for the district as opposed to the overall bottom line in our budget. We are the only state in the nation with a Budget and Control Board, and when bad economic times come our way, the legislative body has handed to this small group the responsibility of making across-the-board budget cuts. So when economic times are rolling, a member can legitimately say to a constituent, “I got you this project or funding.” And when economic times are less robust, a member can point the finger at the Budget and Control Board that cut the constituent’s favored project. The only way to begin to change this dynamic so that our political system is more reticent about overspending is indeed to have members dealing with budget issues both when the tide rises and falls. This is particularly the case given the fact that we have $27 billion in unfunded political promises that go well beyond the budget shortfalls of this year. Finally, this is something that could be dealt with quickly by the Legislature. I’ve seen firsthand how in a few hours tens of millions of dollars in vetoes that we’ve offered could be dispensed with. If we wait on this until January it means there will be a de facto 1.5 percent across-the-board cut to all agencies. This doesn’t make any sense when some agencies like Corrections or Education are already running deficits. It also makes no sense given the glaring differences in some spending categories. For instance, the Competitive Grants program is scheduled to spend $100,000 this fall to give German politicians a holiday at Myrtle Beach, and at the same time, the Department of Education is running shortfalls on fuel for school buses. I won’t belabor the point further, but I think targeted cuts now rather than later are vital to the priority-setting process essential in best using taxpayers dollars.

Earlier this year, my colleague Adrian offered very similar sentiments with regard to California’s mammoth budget crunch, emphasizing the need for a TABOR-style tax and expenditure limitation to keep spending and revenue in line:

Everyone loves a silver bullet; the simple and easy solution to a tough problem. Gov. Arnold Schwarzenegger’s silver bullet is a 10 percent across-the-board budget cut he hopes will erase the $16 billion deficit. If only it were that simple. Don’t get us wrong, budget cuts, like the one Schwarzenegger’s proposed, are often political minefields even though every government department could manage to trim 10 percent of costs and still do its job. Improved efficiency and accountability should always be the goal, and the governor’s cost-cutting makes great sense as a strategic management initiative. But the big picture shows California is constantly buried under multibillion-dollar deficits, not because departments are spending too much each year, but because the budget is structurally flawed, and no one wants to make the hard decisions that will provide lasting improvements. Gov. Schwarzenegger said, “While these reductions present numerous challenges to implement, this across-the-board reduction approach is designed to protect essential services by spreading reductions as evenly as possible so that no single program is singled out for severe reductions.” In other words, every single program the state spends money on is just as important as every other. That simply isn’t true. The Board of Barbering and Cosmetology is not as important as the Highway Patrol. The cosmetology board should be eliminated, not cut by 10 percent. The Acupuncture Board, Credit Union Advisory Committee and Registered Veterinary Technicians Committee are just a few of dozens of other boards that taxpayers shouldn’t be funding ââ?¬â?? at all.[. . .] When California’s families face tough financial times, we don’t cut our food or health care spending by the same amount that we cut our movie outings. We prioritize, making big reductions in areas like entertainment, while continuing to pay the mortgage and electricity. [. . .] The core of the problem is that nothing forces the governor and Legislature to keep spending in line with revenue. California has passed various reforms, such as the Gann Spending Limit, but the Legislature always finds ways around them. California desperately needs a tax and expenditure limit to protect taxpayers from tax increases and to serve as a method of imposing some restrictions upon Sacramento’s spending. A revenue limit would cap the amount of money that the state could collect in taxes to, say, a percentage of population growth and inflation. If the state collected too much money in a year, taxpayers would get refund checks instead of allowing politicians to spend the ‘excess’ money, as happens today.

I suspect Gov. Sanford would probably agree. Sanford: Advancing Limited Government, Freedom, and Markets More on TABOR here, here, and here Reason’s Annual Privatization Report 2008 Reason’s Government Reform Research and Commentary