Raising taxes makes state fiscal crisis worse

Posted: Mar 18, 2003 12:00 AM

State governments are in a fiscal crisis not entirely of their own making but certainly exacerbated by their extravagance. According to recent estimates, states face combined budget deficits of $100 billion during the rest of this year and next, due in the main to a stagnant economy. But that is no excuse to raise taxes.

Governors and state legislatures are casting their revenue nets widely, all the way from raising taxes on cigarettes and gasoline to expanding gambling and imposing new taxes on Internet sales to people who don't even live inside the state's borders. It is particularly disappointing to see Republican governors, who should know better, in the forefront of this latest assault on hardworking taxpayers.

Not a week goes by that one doesn't hear governors pleading with Washington to bail them out. When that fails, they insist they have no alternative but to raise taxes and further pollute our society with a slot machine on every corner. Nonsense.

The primary cause of the fiscal crisis in America at all levels is a weak economy, but the equally relevant cause is fiscal profligacy that has been accumulating for more than 15 years. From 1986 to 2000, state governments were on a spending binge of enormous proportion. According to a report by the National Federation of Independent Businesses, inflation-adjusted, per-capita state expenditures during that period grew by more than 40 percent. Even with today's weak economy, research by Club for Growth President Stephen Moore and his associates concludes that states currently would be $100 billion in the black if they had just restrained spending growth during the 1990s to the same rate as inflation plus the rate of population growth.

Extravagant spending increases when times were good put a time bomb in state budgets that exploded with a bang when a sinking economy caused revenues to fall and entitlement spending to increase. Raising taxes cannot defuse that time bomb. The key to resolving state fiscal problems is to revive economic growth, and the key to doing this lies with the kinds of tax reforms and tax rate reductions President Bush has proposed.

Raising taxes - be it the counterproductive idea of raising the federal gasoline tax 20 cents a gallon or any of the panoply of proposed tax hikes at the state and local level - retards economic growth more and digs the fiscal hole deeper. As former Treasury Department official Bruce Bartlett [Townhall columnist] points out, tax rates on cigarettes are already so high in some places (such as New York City, where the price of a pack of cigarettes has been pushed to $7.50) that tax evasion is rampant and revenues are beginning to fall.

Ohio's Republican state Senate president Doug White illustrates how state officials are allowing the fiscal crisis to corrode their principles where gambling is concerned: "I do not like gaming, I do not participate in gaming and I do not encourage anyone else to participate in gaming because it's a loser's game," he said. Yet, White has vigorously pushed a bill in the Ohio Senate that would put slot machines in the state's horse-racing tracks.

Worst of all, many governors are also pushing the idea of an Internet tax cartel that would allow states to impose their sales taxes on people making Internet purchases who don't even live in their state. In truth, this is simply an old bad idea looking for a new excuse to justify it. The states think they've found their excuse in the revenue shortfalls caused by an economy suddenly too weak to support the extravagant spending they enacted during the good times. Anyway, most e-commerce is business-to-business and thus not even subject to the sales tax.

Frank Shafroth, executive director of the National Governors Association, laments that if only states could tax online sales to individuals who live outside their borders, they could plug 30 percent to 50 percent of the state budget deficits this year. What he neglects to point out is that the governors' lobby was pushing this Internet tax cartel scheme even when state coffers were awash with revenue.

The only effective way to guard against budget gaps during economic slowdowns is to minimize economic slowdowns in the first place and limit spending during economic good times. Colorado, where Bill Owens is governor, has an effective Taxpayer Bill of Rights that does it right - limiting growth in state revenues to the rate of inflation plus population growth.

Liberals love to quote John Maynard Keynes, but just read his words back in 1933: "A reduction of taxation will run a better chance than an increase of balancing the budget.

To take the opposite view resembles a manufacturer who, running at a loss, decides to raise his price. And when his declining sales increase, the loss decides that prudence requires him to raise the price still more. And who, when at last his account is balanced with naught on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss."

Cutting tax rates to revive economic growth as President Bush wants to do is no "riverboat gamble." It is the prudent thing to do.