Friday, 18 June 2010 00:00
Governments should continually measure, rethink, rework and reorganize the ways that they provide critical services and worthwhile programs, increasing productivity and effectiveness. That’s the critical missing element in the current state budget stalemate. Our local governments are also not getting ready for the aftermath.
Many across-the-board cuts are likely, and some have already been implemented. There is no deep thought being given to what this means in real life. You can’t cut staff and budgets and expect to maintain old goals, old procedures and old outcomes. Remaining programs will probably become less efficient, less useful and more frustrating to deal with. Worse, without any real game plan, functions often become more expensive on a per customer basis than they were before. We end up paying more for less.
During the 2010 fiscal year (46 states start the 2011 fiscal year on July 1), state governments have closed $174 billion in budget gaps, and at least 36 states are already projecting additional deficits of $89 billion for next year. The problem is unprecedented declining revenues. An estimated one-third of current projected county budget deficits across the country are attributed to reductions in assistance from states.
In the mid-1970s, New York had 14 state income tax brackets, ranging from 2 percent to 15 percent. That has all been compressed into five brackets, plus two temporary brackets for higher-income taxpayers added last year. Income growth has been concentrated at the top of the income scale since the 1980s. If we had kept the old brackets, most of us would be paying at a lower rate, and 85 percent of the current state budget deficit would be closed.
We are told that the worst thing to do in a recession is to raise taxes and the only reasonable course of action is to slash spending. Cut now, think later.
But it’s not so simple.
During the 2001 recession, Joseph Stiglitz of Columbia University, who was awarded the Nobel Prize that year, and Peter Orszag of the Brookings Institute, who now runs the White House Office of Management of Budget, tried to determine how states could close budget deficits and do the least damage to an economic recovery. They determined that tax increases do not reduce consumer activity on a dollar-for-dollar basis, while some types of spending reductions do reduce it dollar-for-dollar. All things being equal, tax increases are less harmful to a weak economy than spending cuts.
In 2008, the chief economist of Moody’s bond rating service, which so many of our local officials love so much, testified before a Congressional committee that every $1 billion in reduced New York State spending had a negative multiplier effect that decreased the state’s GDP by $3 billion. For bonus points, most savings in state spending would be eaten up by reduced tax revenues and increased unemployment compensation.
Tax and revenue increases alone will not solve our problem. Spending decreases and retrenchment should not be taken off the table. But we have this Bizzaro World scenario playing out in which we make believe that a large, obvious part of the equation doesn’t exist.
Across the state, everything from day care programs to food banks to libraries are on the block, and it’s all just starting. Meanwhile, canceling the automatic rebate on the state’s Stock Transfer Tax is off the table. Twilight Zone.
We don’t have honest discussion about how to pay for programs, how to keep them running, how to run them differently in a time of changing needs and expectations.
During the Great Depression, New York raised its top income tax rates from 3 percent in 1930 to 8 percent in 1934 in order to forestall fiscal disaster. We’re up against it again. The things that help keep Long Island a place where middle class people want to live, work and raise families cannot be sustained under our current, outdated finance system. We’re just at the start of it.
And if we decide that much of what we’ve built here must go, we should at least talk about what might replace it. Or shall we just wing it?
Michael Miller is a freelance writer, designer and strategic consultant who has worked in state and local government. Email: email@example.com