States face fiscal crunch: after 1990s' spending surge.

• Author: Moore, Stephen
• Position: National Affairs

"... Governments must maximize their efficiency and not let tax rates get out of line with neighboring jurisdictions. Tax increases result in fewer businesses, slower economic growth, and a smaller tax base."

STATE POLICYMAKERS are looking for ways to close large budget gaps this year and next. Many states are pursuing tax increases on the heels of an aggregate state tax increase of more than $8,000,000,000 in Fiscal Year 2002. Tax hikes, though, will not solve the basic problem of overspending that prevailed in the states during the boom years of the 1990s. This dilemma has not been recognized by groups such as the National Governors Association and the National Conference of State Legislatures, which are pointing fingers everywhere but at state lawmakers themselves for current difficulties.

Other pundits are blaming tax cuts in the late 1990s for today's state budget troubles. Data from the National Association of State Budget Officers (NASBO) shows that net state tax cuts in the late 1990s (FY1995 to FY2001) totaled $33,000,000,000, but those cuts were not enough to return to taxpayers the $36,000,000,000 in net state tax hikes that occurred during the early 1990s (FY1990 to FY1994). With 2002's $8,000,000,000 in state tax increases and rises in FY2003, taxpayers will be even further in the hole.

State government officials proclaim themselves innocent victims of revenue "shortfalls." However, are states suffering from revenue shortfalls or spending excesses? Consider that the budget gaps being reported are partly fictions created by prior budget forecasts that were far too optimistic--sort of like sales growth predictions for telecom companies in the 1990s. Suppose that a fictitious Governor Spendthrift had planned for a six percent rise in her state budget, while Governor Frugal planned for an increase of three percent. Then, suppose that actual revenue expansion in both states turned out to be three percent. That would be no concern for Frugal, but Spendthrift would describe her situation as a three percent "shortfall." Yet, Spendthrift's actual problem is a "spending excess" caused by an overly optimistic budget plan.

Let's look at the spending record. While inflation averaged 2.8% annually from FY1990 to FY2001, state general fund spending grew at an average rate of 5.7%, according to NASBO. Total state general fund spending rose particularly rapidly at the end of the 1990s, with growth of seven percent in FY1999, 6.6% in FY2000, and eight percent in FY2001. Even as economic growth slowed and budget gaps appeared, state spending still went up 1.1% in FY2002 and is expected to increase further in FY2003.

Another variation on the shortfall theme is the supposed identification of "structural shortfalls" in revenues. Several states have used this bogeyman as an excuse to push for broad-based tax increases. It is said, for example, that Internet sales are eating away at state sales tax bases. Yet, U.S. Department of Commerce...