The Real Solution to the Budget Crisis: Smaller Government

Posted on November 16, 2001 | Type: Op-Ed
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When politicians propose ways to balance the budget many of their solutions are bad ideas. Governor Hull has proposed one of the worst. Instead of offering enough spending cuts to eliminate the entire deficit, she proposes to cover $283 million of the budget gap by having the state borrow the money.

The worst way to balance a budget is to raise taxes, but in the long run borrowing is just as bad. Borrowing, like raising taxes, encourages more spending; and borrowing today means higher taxes tomorrow to pay off the debt incurred. For the past five years, the state government has been on a spending spree. The last thing we should do is hand it a credit card. The only real options to solve this budget mess are to cut spending and to dip into the rainy day fund.

To keep spending under control in the future, the budget should grow no faster than population growth and inflation. In fact, if spending had been held to this standard since 1995, the state budget would be $650 million smaller, and we would not be facing such a large deficit today.

Across the nation, state governments are experiencing "budget crises" of their own making. These deficits are hangovers that the states are suffering the morning after their spending binge of the past five years. Since 1996, out of every three dollars of state surplus tax revenue, two were spent.

Arizona's experience is similar. When tax revenue poured in, spending went up. Only 30 cents of each new tax dollar was returned to taxpayers. There is one indelible political truth in budget politics, and it's been proven again in Arizona: if the money isn't returned to the taxpayer quickly, it will be spent.

The best way to kick government's spending habit is to put into place a cap on expenditures and return any excess money to the taxpayer. The Arizona Constitution currently has a limit to keep appropriations under 7.41 percent of total personal income in the state. This limit, and others like it across the nation, has not been effective at stanching profligate spending. In boom times, personal income grows quickly, allowing state budgets to grow just as quickly. Which is exactly how we got into this mess in the first place.

The best spending cap would let spending grow no faster than population growth plus inflation. During this special session the legislature should refer to the ballot for taxpayer approval such a limit on future expenditures. Any surplus revenue should be immediately refunded to taxpayers. Finally, voters must approve any spending in excess of the cap.

Colorado voters passed such a spending limit in 1992 referendum. Called the Taxpayers' Bill of Rights (TABOR), it amended the state's constitution to limit the growth of general fund spending to population growth plus inflation. TABOR also requires surplus tax revenue to be refunded to taxpayers. The spending limit may be lifted for only one year at a time through popular vote.

The success of TABOR has been astounding. State spending has been kept under control, and between 1997 and 2001, the state of Colorado has refunded more than $2 billion to taxpayers. Despite the clause allowing the caps to be breached with voter approval, big spending has rarely won an election. Every year from 1993 to 1999, there has been a proposal on the ballot either to raise taxes or increase spending in excess of the TABOR limit. In each case, the proposal has been defeated. Even when Colorado voters passed a ballot initiative this year to increase education spending, the state government was still in good enough fiscal shape to refund roughly $900 million to taxpayers.

If such a limitation had been enacted at the beginning of Governor Hull's term, taxpayers would have had refunded to them more than $2.7 billion dollars-more than twice the total of all tax cuts since 1993. If this year's budget were cut by $650 million and next year's budget held to projected population growth plus inflation, the projected $1 billion budget deficit would disappear.

The legislature has a duty to make sure that the fiscal discipline they muster today does not wither away in the future. Borrowing money to gratify current spending habits and sticking future taxpayers with the bill is a bad idea. To eliminate the deficit the legislature must cut spending, and use the rainy day fund if necessary. This should be the only proposal on the table. Arizona taxpayers deserve no less.

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