Small Business Reading Room

Tuesday, May 18, 2004

State Tax Games

What advice would you give to a guy who is financially over extended with debt, mortgage, car payments and does not make enough money to pay his minimum charges? Consider now that he already works a day job and a night job just to keep afloat.

We in Delaware call this a No Brainer. His best solution is to reduce his debt and cut back on spending.

But that is not the way it works in most state capitals.
Consider New York;
According to Cato Institute Policy Analysis Number 506 (Cleaning Up New York State's Budget Mess) New York spent $77 billion in FY00 and a whopping $91 billion in FY03. That is a 25% increase over three years!

The author, Raymond J. Keating, puts the problem in perspective: ..."if spending growth had simply been held to the inflation rate since FY95, total state spending would be $77 billion in FY04 rather than the $95 billion currently projected, and there would be room to balance the budget and cut taxes."

All this spending means the budget deficit will merely stay stable at around $9 billion meaning more borrowing to finance todays spending.

The same dynamic is at work in almost all fifty states. The states, like Colorado, that have constitutional limits on spending growth avoid this problem by taking the gross spending decision out of the hands of politicians.

In Delaware, the Governor split the difference based on budget assumptions that were off by a country mile. She raised taxes and fees (those who own LLCs will know what I mean), cut spending and deferred some capital spending. Then, when the budget deficit miraculously reduced itself, she cancelled the spending cuts. Guess what happened to the taxes and fees. You are right, they are now in effect.

So when the government argues that they do not have enough money, don't believe it. What they mean is they do not have enough money to cover all of their profligate spending.



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