Federal and state governments will see sharp reductions in tax revenue collection this year and for years to come. Budget deficits are rising to record levels, and there are only two ways for elected officials to bridge these deficits: by raising taxes and by reducing spending. Since the 1980s, our government has proven that restraining the urge to spend in a meaningful way is far too challenging. When faced with budget deficits, increasing taxes is the easy solution far too frequently implemented.
The federal budget deficit is projected to reach $1.8 trillion in this fiscal year and $9 trillion over 10 years, which is $2 trillion more than forecast just four months ago. These days we throw “trillions” around nonchalantly without realizing how big that number is. To put our $1.8 trillion into perspective, a deficit that large is $3.4 million per minute, $200 million per hour and $5 billion per day.
State and local governments, representing about 15 percent of the economy, are in the beginning stages of the worst contraction in postwar history amid an aggregate deficit of about $175 billion for fiscal 2010 and a gap of $400 billion in fiscal 2011. The tax revenues of state governments have recently plunged more than 25 percent from a year earlier, as rising unemployment and reduced consumer spending have hurt sales and income tax collections. The drop in total tax receipts is the worst in a half-century. The biggest drop among major revenue sources was in state income taxes, which were down more than 30 percent from a year ago. Sales tax revenues fell by 9 percent. Due to these revenue reductions, three-fourths of the states have deficits exceeding 10 percent of their budgets. Only an emergency infusion of printed federal funny money is keeping most state boats afloat right now.
From 1930 to 2008, our national average annual real GDP growth rate has been 3.49 percent. It has been estimated that it would take GDP growth of at least twice the historical average to return state tax revenues to their previous long-term trend line by 2012. Wishing for an improbably huge boom while chasing your own tail through self-destructive tax increases won’t prove to be much of a strategy. Unlike the federal government, states cannot deny reality by borrowing without limit. The Obama administration’s “stimulus” package, in effect, shared the use of Uncle Sam’s printing press for two years. But after the money runs out, reality will set in. Even if a second round of stimulus is driven by the political panic of bankrupt governors, it would only postpone the day of reckoning.
THE REALITY IS THAT lower tax revenues will be with us for the foreseeable future, requiring reductions in the size and scope of our state governments.
At a time when states should be disciplined when it comes to spending, lessons from the past have not been learned. In New York, for example, our new state budget is $131.8 billion—10.1 percent, or $12.1 billion, higher than last year’s. Politicians explain the increase as a result of federal stimulus dollars. This math doesn’t add up. Extracting the money provided by the feds, state spending still increased by $5.9 billion, or 4.7 percent. This is more than twice the rate of inflation. Most individuals and businesses have reduced their budgets in the wake of our current financial circumstances, but no such luck for our state. In order to try to pay for this increased spending, the budget includes 137 new or increased taxes, fees and charges.
