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Sunday, February 23, 2020

The Budget, Part 1: Foresight 2020

We need to change the long-term conversation about the state budget. Specifically, we need more accountability on how our dollars are being spent.

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Both the House and the Senate have now processed the state budget, sending the two different versions into reconciliation. Usually the two chambers work their way through their differences without much fireworks. It would be surprising if the same did not happen this year, but this time it would actually be good if they stirred up some debate around the budget. 

The second part of this article will examine the budget in detail, but before we get there we need to take a look at the policy strategy behind the budget. It is, namely, a common mistake among analysts of state finances, especially appropriations, to get bogged down in details about individual items. This is understandable, but it also tends to trap the budget conversation in a reactive loop: we respond to changes in details rather than to set the agenda for where the budget needs to be next year and further into the future. 

We need to replace hindsight with foresight. To do so, we need to add a line of reasoning to the ongoing budget conversation. The existing two lines are the centrist one with proposals to both raise taxes and cut spending, and the statist one that focuses exclusively on raising taxes.

These two lines were well represented in yesterday's (Saturday) Wyoming Tribune Eagle. Senator Cale Case expressed frustration over the fact that the legislature can't decide on which leg to stand (p.A2, print ed.). The senator, the paper reports,
said it appears to him as though the Legislature wasn't willing to seriously tackle any solutions to either create new revenue streams or make serious spending cuts. "We could've cut three ro four times as much as we did," said Case, who voted against the budget bill.
Senator Case, of course, is co-chairman of the Joint Revenue Committee and as such a major champion of all sorts of tax hikes. If the good senator wants to have a serious conversation about spending reform, he might want to tone down his campaign to give the Wyoming economy such economic poison pills as a corporate income tax. He is also welcome to join others who think that a Taxpayer's Bill of Rights, TABOR, is the way forward. Representative Chuck Gray sponsored a very good bill for this purpose, one that I know he worked hard on. It is an improvement over an already good Colorado TABOR, and it is tuned for the specifics of the Wyoming economy

Senator Case is warmly welcome to get behind it. In fact, if he did, it would be a nice door opener for a foresightly conversation about where the state budget should be in 4-5 years. This would set the spotlight on structural reforms to government spending. The problem, namely, is that we have a structural budget deficit that is considerably bigger than the $200 million that is sometimes mentioned in the budget debate. I will publish an updated estimate of the structural deficit in a few days; for now, let us just note that in order to close a structural deficit you need to structurally reform government. 

It is possible to do more with less - to be more efficient - and it is necessary to start any structural reforms with efficiency reforms. However, that is a necessary but not a sufficient reform strategy. To this point, according to the Tribune Eagle, Representative Chris Rothfuss explains:
House Minority Floor Leader Chris Rothfuss, D-Laramie, echoed Case's frustrations, though he emphasized the critical need for the state to create new revenue streams. "The revenue discussion has to be the more serious discussion," Rothfuss said. He expressed disappointment that the theme of every legislative session he's been in has focused on doing more with less, adding the budget for the upcoming biennium was just "same old, same old."
Rothfuss is wrong in criticizing the do-more-with-less ambition per se. It is absolutely necessary that our state government, and local governments, implement comprehensive efficiency reforms. As Americans for Tax Reform President Grover Norquist recently pointed out in an interview with Glenn Woods on KGAB AM650, there is not a single government function that cannot do better in terms of efficiency. The private sector, Norquist explained, does this all the time - why should government not do the same? 

Therefore, any ambition to rein in the structural deficit in the Wyoming state budget must start with efficiency and transparency. Once that process is under way, the next leg is to focus on the actual functions of government. With a structural deficit well above $200 million we need more than efficiency gains; they constitute a very nice, much-needed down payment of sorts on spending reductions, buying us valuable time to address the structural deficit with structural reforms. 

The problem, of course, is that the conversation about those structural spending reforms is far too weak. With Cale Case representing the conservative-leaning line on taxes and spending - asking for cuts while promoting tax hikes - and Chris Rothfuss spearheading the all-out spending line, there is a big gap to be filled to the right of Senator Case. 

Perhaps our legislature should appoint a committee to analyze the structural role of government?

One of our most pressing needs in terms of structural reforms is to stop the slow drift of state spending away from the General Fund. A growing share of our state spending is run through Other Funds, which in theory are not supposed to be funded by taxes. Since the conversation about the budget usually centers in on the General Fund, growth in the Other Funds share tends to go unnoticed. With comprehensive budget reform, including a WyoTABOR, we can put a stopper to this trend.

Ten years ago, half of all state spending here in Wyoming went through the General Fund; today, Other Funds account for half of it. Tables 1a and 1b compare all 50 states to us:

Tables 1a and 1b: Structure of state spending, all 50 states and Wyoming
Source of raw data: National Association of State Budget Officers

All 50 States
GF FF OF
2010 38.1% 34.8% 24.9%
2011 38.2% 34.0% 25.6%
2012 40.2% 31.1% 26.6%
2013 40.9% 29.8% 27.3%
2014 41.5% 29.7% 26.8%
2015 40.5% 30.8% 26.7%
2016 40.8% 31.2% 26.2%
2017 40.8% 30.9% 26.5%
2018 40.9% 31.0% 26.4%
2019 40.8% 30.8% 26.5%

Wyoming
GF FF OF
2010 50.1% 18.7% 31.2%
2011 46.2% 25.2% 28.5%
2012 42.7% 26.9% 30.4%
2013 40.6% 25.8% 33.6%
2014 25.9% 17.8% 56.3%
2015 23.8% 16.0% 60.2%
2016 36.8% 19.1% 44.1%
2017 34.6% 20.9% 44.5%
2018 31.3% 20.9% 47.8%
2019 32.0% 17.9% 50.1%

The drift of state spending from the General Fund to Other Funds suggests that we need to have a conversation not primarily about the amounts being spent - although that is of course an important component - but first and foremost about the functions of government. To the credit of both Senator Case and Representative Rothfuss, they do put their fingers on this spot when they suggest that we cannot expect government to do more and more without being willing to pay for it. 

What they do not add is that our lack of willingness to pay for the functions of government is not based on selfishness, but on utter necessity. We know that paying more in taxes is unsustainable and unaffordable. We also know that the private sector is better at education, health care, welfare and almost everything else that government does. 

Going forward, we need a budget conversation that concentrates on the permanent reduction of government and the permanent protection of taxpayers from future tax grabs and overspending.

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