Family, state budget processes not analogous

Posted on February 16, 2005 | Type: In the News | Author: Satya Thallam
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We hear it all the time: "If a family should be forced to reduce its budget in bad times, so should government." It has become something of a mantra among fiscal conservatives. 

Advocates on the opposite philosophical bank have extended the analogy, arguing that just like families, government must often spend more than it has to pay for its needs. As state Sen. Bill Brotherton, D-Phoenix, quipped, "Tell me which of the Republicans bought their house with cash." In other words, families don't entirely tie a given year's budget to that year's income - neither should government." 

In reality, the state's budget has little in common with family finances. Given a projected fiscal year 2006 deficit of $477 million, it's important to understand why. 

To begin, the revenue source is different. The state does not work to earn money, but rather extracts money from people and then appropriates the funds. Families must make tradeoffs to determine how much they will earn, working and consuming more or less to match needs with constraints. 

While both are subject to overall conditions of the economy, the state has little incentive to reduce spending. Pressure from a seemingly endless array of interest groups encourages legislators to spend, but little countervailing force protects taxpayers from having to foot the bill. 

Families tend to make more efficient decisions, recognizing that every choice requires tradeoffs. The decision to save for a child's college tuition may involve eating out less often. 

Government, however, rarely considers such constraints when deciding how to tax and spend. Taxation, consequently, is rarely designed to be efficient, such that it will cause the least amount of economic disruption. 

Unlike the Legislature, the family's decision of which desires to satisfy is tied to how much work went into creating the available pot of money, how available additional funds are, and an implicit cost-benefit analysis of how worthy each interest is compared to everything else. 

Even well-meaning politicians just don't face the reality and choices that families do, given the seemingly never-ending spigot of tax revenue they have to draw from. It creates an escape hatch through which the legislature can avoid making the tough choices required to reconcile revenue with expenditures. 

This includes the cost of taking on debt, where a family is in a much better position to understand the full cost of borrowing money. Politicians as a group have limited foresight, usually only the length of a term or two in office. Therefore, they have little incentive to look beyond tomorrow's election and consider the consequences of today's deficit spending. 

Families operate on much longer time horizons than politicians. That means they foresee and act according to consequences that are much further down the road, typically taking on debt to finance long-term goals (home ownership, college, etc.). 

Without some kind of strict institutional check, we can't realistically hope for a consistently prudent budget from year to year. Even a constitutional requirement for a balanced budget hasn't done the trick. With culpability not falling on any one person, the l legislative and executive branches are able to spread blame without anyone actually taking the fall. 

A tax and expenditure limitation, like Colorado's Taxpayer Bill of Rights, would work. TABOR mandates that the state's per capita spending can grow only as fast as inflation and any surplus revenues must be immediately refunded to taxpayers. 

If Arizona, like Colorado, had passed a measure like this in 1992, we could have avoided extensive budget growth (general fund spending doubled over the 1990s) and ensuing budget shortfalls ($1.2 billion in fiscal year 2003 alone), as well as refunded $3.8 billion to taxpayers over the last 10 years. Split equally among the number of 2003 income tax filers, the refunds would total $1,650 per taxpayer over the decade. 

Understanding the differences between the state budget and the typical family's will help us create the institutions necessary to ensure responsible spending year after year, without annually resorting to the extensive political in-fighting we've come to expect. Taxpayers develop their own rules on how to best spend their money, but we just can't expect those to carry over to the state.

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