The State of Idaho is facing a $400 million budget shortfall. This could mean a further reduction in k-12 funding of up to $200 million and $175 million reduction in the Department of Health and Welfare (DHW). Why are tax revenues down? What can be done?
Tax revenues are down because the private sector of the economy has contracted. Idaho once had a $54 billion economy that generated $3 billion in tax revenues at a 5.5 percent average tax rate. A $45 billion state economy at the same 5.5 percent generates only $2.4 billion in taxes.
It is obviously better to have a bigger economy than a smaller economy. A $60 billion economy would generate more taxes for public education, roads, and social programs than a $40 billion economy.
Fact: higher taxes and more regulations act like a brake and slow the economy while lower taxes and fewer regulations stimulate the economy.
We have one of three choices:
1. Do nothing to reduce taxes and regulations and hope the economy improves by itself. This is called the Titanic Approach; hang on long enough and it will come back up.
2. Raise taxes to protect the state budgets like education and DHW and run the risk of slowing the economy even more. A smaller economy at a higher tax rate will result in less tax revenue than a larger economy at a lower tax rate. ($40 billion x .06% = $2.4 billion: $60 billion x .05% = $3 billion)
3. Reduce taxes and regulations to stimulate the economy.
Which is the wisest policy to adopt?
The Titanic Approach is a passive approach. It is doomed for two important reasons. First, according to Americans for Tax Reform, the cost of government is 48 percent of the GDP (Gross Domestic Product) plus another 15 percent of the GDP to pay the cost of regulations. The cost of taxation and regulations is too high in order for the economy to significantly improve. Second, environment regulations are killing natural resources and manufacturing jobs which form the foundation of any strong, stable economy. The strategy of doing nothing runs the real risk of condemning the average Idahoan to a steadily declining standard of living for years to come.
Raising taxes will guarantee a smaller economy and a prolonged recession. Who would make this choice?
The last choice, our only real choice, is to reduce taxes and/or the cost of regulations to allow the private sector of the economy to expand and regain its strength. I see a real opportunity for the State Legislature to reduce the cost of regulation which has the same effect as a tax cut and getting more money into the private sector without reducing tax rates. While it will not be easy to reduce spending and still maintain services, for far too long the legislature has taken the easy approach of raising taxes when the going got tough. What will happen this year? What will the legislature do? What do the citizens of Idaho support?
Friday, December 10, 2010
Monday, December 6, 2010
Cut Spending or Raise Taxes?
The Prime Issue of the 2011 Legislative session is what to do about a shortfall of $400 million in the general fund. The legislature has two basic choices:
1. Raise taxes rates
2. Cut spending
I would like to explain why I cannot support a sales, corporate or individual tax increase. I fear that too much time will be spent debating if we should raise taxes or not. The answer is unequivocal: no tax increases. The sooner the legislature comes to this conclusion, the sooner real solutions can be found. Here are a few reasons not to raise taxes.
First: current tax rates are too high and should be cut by 30 percent. According to the Americans for Tax Reform Foundation, 63 percent of all wealth created each year in the United States goes to federal, state, local taxes and/or pay for the cost of regulation. The cost of taxation and regulation should never exceed 40 percent of the GDP. In 1900, the percent of the GDP that was needed to fund all levels of government was only 8 percent! Government is getting plenty of money. Government does not need any more taxes. Government needs to use its current funds more efficiently.
Second: The private sector is struggling. Taxes come from private sector economic activity. State tax revenues have fallen from $3 billion two years ago to $2.3 billion this year. An increase in taxes would further reduce private sector activity and stifle the economy.
Third: Unemployment is up because there is not enough work or wealth in the private sector. If the legislature raises tax rates on the private sector, there will be less money left for businesses to hire workers and tax collections will drop even further.
Fourth: The legislature needs to fund public education. Public education cannot be funded with a shrinking private sector which is the source of public school funding. In order to fund public schools, the health of the private sector must be the 2011 legislature’s main focus. A $56 billion Idaho economy will raise $3 billion while a $45 billion economy will raise closer to $2 billion.
Fifth: The economy is stimulated by private sector production; not by government sector spending. The private sector produces wealth. The private sector is a perpetual wealth producing machine. It does not need government to continue producing wealth.
The government, on the other hand, does not produce wealth. It consumes wealth and gets in the way of the privates sector’s efforts to produce wealth by creating regulations. Regulations and taxes are a burden on the private sector. Proof that the government consumes wealth is to answer this simple question. How long would any government worker receive a paycheck if all taxes were suspended for one year? Government cannot survive without taxes paid by the private sector. (Inflation and printing money is a type of taxation.)
If raising taxes is not an option, then how will the legislature fund public schools and still provide essential government services? Two budgets (Education and Health and Welfare) must be the focus of the legislature’s deliberations because these two budgets consume 85 percent of state general funds. Two separate efforts need to proceed simultaneously. First reduce the cost of government. The second is to reduce the cost of regulations. I would offer several suggestions in the next post.
1. Raise taxes rates
2. Cut spending
I would like to explain why I cannot support a sales, corporate or individual tax increase. I fear that too much time will be spent debating if we should raise taxes or not. The answer is unequivocal: no tax increases. The sooner the legislature comes to this conclusion, the sooner real solutions can be found. Here are a few reasons not to raise taxes.
First: current tax rates are too high and should be cut by 30 percent. According to the Americans for Tax Reform Foundation, 63 percent of all wealth created each year in the United States goes to federal, state, local taxes and/or pay for the cost of regulation. The cost of taxation and regulation should never exceed 40 percent of the GDP. In 1900, the percent of the GDP that was needed to fund all levels of government was only 8 percent! Government is getting plenty of money. Government does not need any more taxes. Government needs to use its current funds more efficiently.
Second: The private sector is struggling. Taxes come from private sector economic activity. State tax revenues have fallen from $3 billion two years ago to $2.3 billion this year. An increase in taxes would further reduce private sector activity and stifle the economy.
Third: Unemployment is up because there is not enough work or wealth in the private sector. If the legislature raises tax rates on the private sector, there will be less money left for businesses to hire workers and tax collections will drop even further.
Fourth: The legislature needs to fund public education. Public education cannot be funded with a shrinking private sector which is the source of public school funding. In order to fund public schools, the health of the private sector must be the 2011 legislature’s main focus. A $56 billion Idaho economy will raise $3 billion while a $45 billion economy will raise closer to $2 billion.
Fifth: The economy is stimulated by private sector production; not by government sector spending. The private sector produces wealth. The private sector is a perpetual wealth producing machine. It does not need government to continue producing wealth.
The government, on the other hand, does not produce wealth. It consumes wealth and gets in the way of the privates sector’s efforts to produce wealth by creating regulations. Regulations and taxes are a burden on the private sector. Proof that the government consumes wealth is to answer this simple question. How long would any government worker receive a paycheck if all taxes were suspended for one year? Government cannot survive without taxes paid by the private sector. (Inflation and printing money is a type of taxation.)
If raising taxes is not an option, then how will the legislature fund public schools and still provide essential government services? Two budgets (Education and Health and Welfare) must be the focus of the legislature’s deliberations because these two budgets consume 85 percent of state general funds. Two separate efforts need to proceed simultaneously. First reduce the cost of government. The second is to reduce the cost of regulations. I would offer several suggestions in the next post.
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