The new whopper deficit projected for Minnesota’s state government underscores how much the business cycle affects the state’s finances and the need for better mechanisms to reduce such downpour-to-drought swings.
For much of the past decade, we were told the state had a “boatload of money,” and we all would get rebates. Indeed, getting a check back from the state seemed to become the norm in the booming economy of the late 1990s.
We would be better off as a society here in Minnesota if we had set aside most of the boatloads of money that were rebated to taxpayers during the boom.
When things turned bleak for state government a year ago, a divided Legislature this past spring did little more than some Rube Goldberg tinkering.
Everyone seemed anxious to bury fiscal problems in a temporary, shallow grave and get on with the election. Now the corpse is starting to smell, and its exhumation promises to be decidedly nasty.
It’s easy to criticize the political expediency that prevailed in the last legislative session, but the underlying problem is fundamental and requires more creativity to solve.
The problem is when a state government relies heavily upon income and sales taxes, its revenue is tied directly to the economy’s performance. When the economy booms with high incomes and strong consumer spending, income and sales tax receipts are robust. When the economy is in recession, revenues from both taxes plummet.
Making things worse, much of the state’s spending is inversely related to economic conditions. State spending on welfare, unemployment, energy assistance and other programs tends to rise when the economy slips into recession. It’s low when times are good.
As a result, the state pours money back into local economies at a time when it is least needed and has to cut expenditures or raise taxes when times are tough.
Economist John Maynard Keynes argued government should cut taxes and increase spending in recessions and raise taxes and cut spending during booms. He wasn’t talking about state governments, of course, and his belief of government’s impact on the economy through fiscal policy is largely discredited.
Even so, it remains stupid to cut taxes, even through rebates, or to raise spending when the economy is red hot and then do the opposite when it is cold. The challenge is to create an effective institutional means to save during fat years and then spend the accumulated savings during lean years.
At the Capitol during the recent fat years, lawmakers gave into temptation. Big spenders looked at accumulated surpluses and, with dollar signs gleaming before their eyes, funded new programs. Tax cutters were blinded by the same dollar signs and decried how Minnesotans were groaning under the burden of taxes.
There are a lot of sensible legislators in the middle, but they need some sort of institutional constraint to protect them from the pressures of the spend-every-dollar wing on one hand and the cut-taxes crowd on the other.
Minnesota already has a “rainy day fund” that is a step in the right direction. The state needs to expand that fund and insulate it somewhat from direct legislative control.
One way to do that would be with a non-partisan or bipartisan board, modeled on the Federal Reserve governors, that would claim surpluses in boom times and release them to cover deficits during busts. Just as the German Bundesbank has a statutory mandate to maintain price stability, such a Minnesota fiscal board could be given a charge to accumulate and disburse surpluses to smooth state spending over the long term.
State economist Tom Stinson, who has an enviable reputation for competence and political impartiality, could advise the board.
Legislators find it hard to give up any power of the purse. But just as Fed governors take the political heat off Congress in making hard monetary policy decisions, a Minnesota fiscal board could take the heat off of legislators and give the sensible center a weapon against the extremists in both parties.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.