When a business is faced with declining revenues or decreased margins, it is forced to take action to improve its financial picture. From streamlining operations to selling off under performing assets, shoring up the bottom line is always a key focus. Rarely, especially in a market teetering with deflation, is non-essential spending a smart business strategy. But unfortunately, many of the states in which we live and pay taxes do not think like businesses.
Let’s first examine the case of California, whose budget woes garner national media attention. California, whose tax base is largely based on taxing income and capital gains, spent freely during the economic bubble, sometimes too freely. In fact, since 1998, state spending increased at 36%, while revenue only grew at 28%. The state essentially spent money before it became available, and based future budgets on expected stock-market inflated revenue.
One would think that the solution would be simple enough; cut current programs to keep them in line with revenue. Already, the state takes, on average, 12.1% of income from residents (among the highest in the country). But the current Democratic administration is adamantly opposed to cutbacks that do not come with higher taxes. This sort of behavior begs the question that led to the creation of such spending in the first place. Consider some budget items from last year―$12K of it went to a “poetry reading” given by the state’s electricity grid operator and a conference on “revolutionary environmentalism” at Fresno State University.
One of the major issues is that local media is not objective in covering state funding and budget issues. Illinois, which faces a shortfall of $5 billion, is, in the local media’s eyes, cutting almost “10,000 construction jobs” for highway repair and expansion in 2003, an effort that should be applauded by state budget hawks. But what the local media is hiding is the fact that in 2002, 55,000 highways construction jobs were created―still a net gain of 45,000 state funded jobs in 2 years.
Furthermore, Illinois still faces other hurdles. In an act that should go down as the greatest act of pension money-management hubris of all time, the state had the gall to issue a $10 billion new municipal bond offering―which it intends to invest in the equity markets – to cover its pension shortfall created from recent stock-market losses. If the state cannot service the new debt to cover future pension payouts, Illinois citizens will have to front the bill in higher taxes.
Compared with Massachusetts, which is planning to increase its budget by $300 million this year, despite facing a budget gap of $3 billion, Illinois should get an award. Massachusetts is fond of appearances. Visitors to the capital city, Boston, appreciate the cheap $1 subway fares (the cheapest in any metro area), and can glaze upon the timeless gilded capital building. What visitors don’t realize is that the state has done little to cut programs despite huge deficits. In addition, residents continue to tolerate a special tax that taxes capital gains at a higher rate that ordinary income.
Only by taking an active role in state government through forcing politicians to be held to the same spending standards as businesses can we hope to change the state spending tide. It might take a few years, but if we vote with our wallets and financial prudence in mind, we can change the addictive spending habits of our state governments.