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Triumph
of the Political Class
Despite gushing
state revenues from economic
growth and tax hikes, the special interests still want
more. Don't believe their spin on the budget. Here's the
straight story.
Virginia's
political class has executed one of the most
extraordinary turn-arounds in living memory. Only two
years ago, citizens voted decisively against referenda
in Northern Virginia and Hampton Roads that would have
raised taxes to build a bevy of transportation projects.
Defeated by rag-tag bands of ill-funded opponents, the
pro-tax coalition of pundits, elected officials and business interests slinked into
hiding.
Look
at where we are now. Under the guise of "tax
reform," Virginia's political class stitched
together a Frankenstein of a tax increase expected to
raise about $750 million a year. No
sooner had the taxes gone into effect than it became
evident that a rebounding economy was generating a
surplus, which had reached about $248 million by
October, the fourth month of the fiscal year. Sniffing
the chum, special interests are churning the waters in a
feeding frenzy over how to divvy up the surplus.
Meanwhile, the developer/road builder axis reportedly
has raised $1 million to push for a second round of tax
hikes, this one dedicating revenues for road and transit projects.
Never
in my 25 years observing the political economy of the
Commonwealth have I seen anything like it. Having
abandoned whatever philosophical coherence it ever
possessed, Virginia's political class is engaged in an
unadorned money grab. It is folly to think that
capitulating to the latest demands will still the clamor
about "unmet needs" or ease the pressure
for yet more taxes. Nothing is ever enough for these
guys. Raising taxes only ratchets
up the cost of state
government to a new and higher plateau.
Desperate
measures are called for. Unless citizens assert
themselves before the next session of the General
Assembly, the special interests will engorge themselves at the
expense of taxpayers and the long-term economic health
of the Commonwealth. Citizens need to push back now, and
we need to push back hard.
It
was clear to a few observers during the tax debate in
early 2004 that the case for a tax increase was a weak
one. Faithful readers of Bacon's Rebellion may
recall the series of columns I published critiquing
(and, in my mind, debunking) the arguments of the tax
advocates. In light of recent fiscal developments, I
hate to say I told you so, but.... I told you so. The
evidence now is conclusive.
The
justification for taxes had two components: (1) Confronting a
"$6 billion budget shortfall" resulting from
the recession, the Warner administration had cut everything from state
government that could reasonably be expected to cut; and
(2) Unfunded needs in education, corrections,
transportation and other areas meant that Virginia faced
a long-term "structural" deficit that could
not be overcome by a cyclical rebound in the economy and
state revenues. Only a tax increase, the argument went,
would provide the revenue to address these core
needs.
Having
addressed the myth of the "$6 billion budget
shortfall" earlier, I will not rehash the issue at
length. (I refer the reader to my previous columns,
"What's a 'Budget
Shortfall'?" and "Paper
Cuts" for the gory details.) I merely invite readers to compare expenditures in
the fiscal 2001/2002 biennium with those in the fiscal
2003/2004 biennium.
(in
$ millions)
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Fiscal
2001-2002
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Gilmore
Proposed
Fiscal
2003-2004
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Warner
Amended
Fiscal
2003-2004
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Total
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$45,424
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$49,386
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$49,227
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(Note:
These numbers combine General Fund and non-General Fund
expenditures for each biennium.)
As
can be seen, in the 2003-2004 biennium, total state spending actually increased by
about $3.8 billion, or about 8.3 percent. What's more,
the final expenditures for fiscal 2003-2004--as amended
by Gov. Warner and the General Assembly--fell short of
Gov. Jim Gilmore's proposed expenditures by a meager
$160 million.
I'm
not belittling the tough decisions that the Warner
administration made to get through the financial crisis. The Governor did cut nearly 5,000 employees
from the state payroll, or about 4.2 percent of the
workforce--although, after cost of living increases,
payroll declined only a tad more than one percent. The
Governor also did pursue significant reforms in state
government IT, procurement, facilities management and
transportation project management--although the savings
during the years in question were trivial.
My point is
that, despite the political theater, state spending
continued to surge. Contrary to the line pushed by
politicians and pundits, state government never went on
a starvation diet. While Gov. Warner was cutting
administrative overhead on the one hand, he and the
legislature were adding back more than $3 billion in
"required" spending--Medicaid, car tax
reimbursements, education, prisons--on the other. To pay
for these increases in fiscal 2003 and 2004, lawmakers
enacted $420 million in new "fees", drew down
the Rainy Day Fund by $841 million and resorted to about
$1.5 billion through "alternate sources of
funding" and "resource adjustments", most
of which can be described as one-time revenue sources
and accounting gimmicks. That's before they
raised taxes $750 million a year.
As
for their contention that a cyclical recovery in
revenues cannot sustain the long-term
obligations of state government, the Governor and his
allies have been proven wrong. Even while the
General Assembly was haggling over how much to increase
taxes, Secretary of Finance John Bennett was informing
the Governor--and the general public through his
website--that Fiscal 2004 revenues were coming in faster
than predicted. A number of lonely voices, including
this columnist, warned that the Governor's revenue
forecasts were too conservative.
As
it turned out, fiscal 2004 closed with a budget surplus
of approximately $350 million. Fortunately, the Governor
and General Assembly put the money to good use,
preferring to accelerate contributions to the Rainy Day
Fund and otherwise reverse some of their previous
accounting legerdemain
rather than expand programs or dole out the money in
pork barrel.
As
the broader U.S. economic recovery gained momentum, the
surplus continued to grow. On November 11, Bennett
reported numbers to the Governor suggesting that revenues were running
about $248 million ahead of estimates after just the first four
months of fiscal 2005. "Revenues have
grown 11.5 percent above the same period last year, well
ahead of the annual estimate of 4.5 percent
growth," he wrote. Annualized, state revenues
are running roughly $750 million ahead of
estimates--coincidentally, very close to the expected
gain in new tax revenues. There's no telling yet how the
final numbers will shake out--there's good reason to
think that the margin of surplus will diminish over the
year--but the excess revenues are bound to be
significant.
The
vast majority of that surplus originates from the
"old" tax base--the tax base that existed
before the 2004 tax cuts. In other words, most of that
surplus would have occurred in the absence of this
year's revenue enhancements. The irrefutable
conclusion: Virginia's political leadership could have
gotten two-thirds of its $750 million per year in extra tax revenues
simply by relying upon economic
growth! If they'd been patient enough to wait one
more year before phasing in all the new spending, they
could have financed the budget without a tax hike at
all.
Warner's
fallback position is that, well, revenues are
looking better this year, but the picture still looks
bleak a few years out. As quoted by Michael Shear of The
Washington Post ("Virginia Could Spend Years in
the Red," November 7, 2004), the Governor said on
WRVA's "Ask the Governor" that Virginia could
face a $252 million shortfall in fiscal 2007 and $31
million in fiscal 2008.
I
have two responses. First, Governor, please share your
revenue assumptions. What rates of economic growth are
you basing that forecast on? You low balled the budget surplus last
year. You low balled it again this year--forecasting
revenue growth of less than half of what actually
transpired. With that kind of track record for
short-term projections, the onus is on you to convince
the citizenry that you aren't under-estimating revenue
growth in the out years.
The
second response is this: What about your vaunted
re-engineering of state government? Your own
cost-cutting commission chaired by Richmond Mayor-elect
L. Douglas Wilder estimated that the state eventually
could achieve $1 billion a year in savings by reforming
the way the state did business. As noted above, your
administration has made important progress in executing these reforms. The savings were minimal in
the years in which the new systems were being
implemented, but they should grow steadily in the out
years. Please tell us, Governor, how much savings do you
expect to generate on the expenditure side? How much of
those savings are included in your long-term budget
forecast?
My
guess, Governor, is that you haven't included any
significant savings from your reforms in your long-term
forecast. Any such savings
would be "speculative". The
"conservative" approach would be to hold off
booking such savings until they have been achieved.
Please let me know if I'm wrong.
Here's
my analysis: Virginia does not face a long-term,
structural budget deficit. With the tax increase in
place, Virginia faces a chronic structural surplus
that will last until the next recession.
Here's
the irony: Warner could have been an undisputed hero in
every corner of the state. Virginia's strong economic growth, which consistently
out-performs the national average, combined with his
re-engineering of state government, would have been
sufficient to meet Virginia's core budgetary needs over
the long term. That includes funding the K-12 schools'
Standards of Quality. That also includes meeting
obligations to the fast-inflating Medicaid program, an
expanding prison inmate population, 100,000 new students
in K-12 schools and a growth in the state's car tax
reimbursements due to the growing number and value of
cars.
Throw
$750 million a year in tax increases on top of economic
growth and re-engineering, however, and it's clear that Virginia will be dealing with chronic budget
surpluses--or it would be dealing with budget
surpluses were it not for the political reality that
politicians always find a way to spend the extra money.
Now Gov. Warner and his indispensable legislative ally,
state Senate Finance Chair John Chichester,
R-Fredericks-
burg,
have a new problem: Their Frankenstein
monster could turn on them. Every special interest in the
state is lining up to claim a piece of the surplus. If
the surplus transmutes into more generously funded
programs, "structural" spending commitments could well make
the Governor's fears
of future budget deficits a self-fulfilling prophecy.
Fiscal
policy in in the 2005 session of the General Assembly
should be guided by three core principles:
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Fund
increased state spending out of economic growth and
re-engineering of government processes. Growth
in General Fund revenues has averaged a hair more
than 6.5 percent annually over the past 22 years, a
period covering two full economic cycles. If that
rate of growth continues--as it should if we don't
botch the business climate with higher taxes--the
General Fund should rack up $780 million a year in
new revenues just
through economic growth. If the state squeezes out
an extra $100 million a year each year in savings
through through re-engineering the bureaucracy, the
Commonwealth should have ample resources to meet its
needs over the next decade.
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Not
one dime for transportation without land use reform.
Virginia's transportation system probably does
need more money. But without reforming the
scattered, low-density pattern of development, which
compels Virginians to drive more frequently and
drive greater distances, spending more money on
roads and transit is pouring money down a rat hole.
The changes can't be cosmetic. They must be fundamental,
encompassing sweeping changes to zoning regulations,
subdivision ordinances, comprehensive plans, transportation funding
priorities, the structure of property taxes and,
ultimately, the configuration of local government in
the state.
Of
the three principles, the third undoubtedly will prove
the most difficult because land use reform cannot be
enacted with the passage of a single piece of
legislation. At the same time, it is the most essential.
Overhauling Virginia's dysfunctional human settlement
patterns is an effort that will take decades of
unremitting focus. But the payoff--lower costs of state
and local government, reduced traffic congestion, a
superior quality of life--make it imperative.
I
don't know of a single politician of any prominence who
embraces all three of these principles. Perhaps one will
emerge from the shadows. Until that time comes, it's up
to us, the citizenry, to build the case for cutting
taxes and reforming state/local government. The first
test of resolve will begin January when the special
interests converge on Richmond. We cannot afford to
fail, or the Commonwealth may get locked in to higher
spending levels forever.
--
November 29, 2004
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