February 03, 2006

Look Before You Leap

Massachusetts Governor Mitt Romney is anxious to cut taxes because of higher than expected revenue projections:
Gov. Mitt Romney yesterday used a big increase in tax revenue in January - up 14 percent from last year - to once again push for a cut in the state's income tax to 5 percent.
However, both sides of the political isle are taking a look before they leap approach:
The Democrat-controlled Legislature has generally resisted attempts to cut the income tax, saying state finances are still on shaky ground.
And ...
But even the business-friendly Massachusetts Taxpayers Foundation is hesitant about cutting the tax rate now.

Michael Widmer, president of the foundation, said the state has long-term pension and health-care liabilities to fund - and he questioned whether the state's economy is all that strong, noting jobs growth has been disappointing. "Revenues are improving, but we can't afford both spending restoration and tax cuts," he said.

During the state fiscal crisis earlier this decade, states had to cut back on services and use other means to trim their budgets. According to a report from the Center on Budget and Policy Priorities, there's some ground that needs to be made up before any action on tax cuts should be considered:

  • The current high revenue growth is taking place from a substantially depressed base; the rapid growth is more an indication that revenues have not yet returned to their normal levels than it is of strong fiscal conditions. State revenues remain below what would be required to support the pre-recession level of services states provided.
  • Analysis shows that state revenues would have to grow by more than 9 percent per year between now and 2008 in order to generate enough funds simply to restore the level of services that prevailed in fiscal year 2000, before the recession.
  • A budget "surplus" also can be a misleading indicator of whether or not a state's fiscal situation is strong. Mid-year surpluses occur when revenues come in stronger than the state estimated when the budget was enacted. A state that at budget time cut important services in order to bring its expenditures into balance with what later turned out to be an overly-conservative revenue estimate would still show a mid-year surplus.

Before state lawmakers take start slashing taxes solely based on early, optimistic revenue projects, they better take a good look at their budgets before they leap.


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