Guest Column

Steve Haner

Reality Check

The politicians in Richmond act as if it were a Herculean achievement to balance the budget this year. They omit just one fact: Biennial spending is still $4 billion higher!

When legislative candidates this fall are done debating the $300 million in new fees imposed in 2002 and 2003 (see Fooling the People, March 10, 2003), they might move on to some harder questions about the underlying issue – state spending.

“These budget amendments bring to a close a year in which Governor [Mark R.] Warner worked cooperatively with the legislature to find a total of almost $6 billion worth of spending reductions,” reads a December news release from the governor’s office. Leading legislators have been equally quick to praise themselves for closing billions in shortfalls and producing “the leanest, most pared-back budget package,” to quote a Senate Finance Committee release.

Reading that, you might think spending is down. It’s actually way up.

The budget appropriates $52.2 billion, which is $4.3 billion or about 9 percent higher than the budget bill adopted three years ago. That is impressive spending growth under any circumstances, but it really stands out in the middle of an economic crisis and a blizzard of rhetoric about budget pain.

The economic reversal has impacted tax revenue. Three years ago the markets were peaking, about to begin their slide back to sanity and then down into despair, ending the outlandish revenue growth the state had enjoyed.

Three years ago the General Assembly’s final budget projected $23.5 billion in General Fund tax revenues in the two years ending June 2002. The budget now on the governor’s desk projects $22.2 billion from the same taxes in the two years ending June 2004. So, that’s at least a $1.3 billion cut, right?

It’s not that simple. That base revenue estimate does not include the infusion of cash from the rainy day fund, the transfer of balances from special fund agencies such as the Division of Motor Vehicles and VDOT, and millions in revenue from new fees. Once the transfers are added in, the projected two-year General Fund revenue is only $600 million lower than the high roller 2000 budget of $25 billion. It’s a cut, but there is a big difference between a $600 million reduction and the implied $6 billion.

Of course, any decline in revenue creates big problems when the state:

·         Is required to increase spending in some areas. The Medicaid program gets $700 million more in General Funds in this budget cycle. It has grown from $2.9 to $3.6 billion despite some significant changes.

·         Chooses to increase spending in others. The car tax reimbursement to localities, paid entirely with General Funds, has grown by $370 million between the two spending plans. How a tax cut became a spending item is another story too often told, but still worth a laugh now and then.

·         Chooses to protect some programs from reductions. General Fund spending is largely unchanged in direct aid to local schools, mental health services, social services and corrections.

Increasing some categories and holding others harmless means something else had to give. General government agencies, transportation, economic development, tourism promotion, non-education grants to localities and higher education took it in the neck. Where user fees are possible, they are being used to maintain programs. The fall 2003 tuition hikes at Virginia’s public universities are already being announced, the third in as many semesters.

General Fund tax revenue is only part of the story. There often are alternate funding sources. This is where the illusion of lower spending really breaks down.

Non-general Fund revenue, the money from all the tuition payments, fees, liquor and lottery sales, dedicated taxes, federal grants and matching funds, is up an astonishing 25 percent in three years. The $4.3 billion in spending growth is due entirely to the growth in these Non-general Funds. One way or the other, these dollars are removed from the pockets of people or businesses.

Sadly, all that extra revenue took the steam right out of efforts for deep reform (or perhaps the fear of deep reform stimulated the hunt for extra revenue – same result).

Promises that this budget process would remake Virginia government beyond recognition have fallen short of the rhetoric. The governor’s changes were not all that dramatic. He reorganized services to veterans, and sought to bring better coordination to workforce programs and the state’s use of information technology.

The General Assembly adopted most of his agency consolidation proposals, but reversed some and put money back into programs the governor considered low priority. Many of the boards and commissions that were repealed were not active, so savings and political pain were actually negligible.

The budget has been under stress for three years now, but few leaders have asked the hard questions, the questions that might lead to dramatic cost savings. 

The question should not be whether the Office of the attorney general should absorb the Human Rights Council. Do we need a Human Rights Council at all? The question should not be whether to pay local commissioners of revenue to provide taxpayer assistance. Why continue to fund commissioners of revenue at all?

The governor was on to something when he trimmed the Division of Motor Vehicles, even if his motive was to transfer its fee revenue elsewhere. The DMV should change its service model to lower its operating costs and encourage more mail, kiosk and Internet transactions, and perhaps eliminate some transactions entirely. How much shorter would the lines be if we stopped trying to register voters at DMV?

Instead the Assembly rushed to raise license fees even further in order to reopen the DMV offices and continue the less efficient system. Even conservative Republicans think that is an accomplishment worth bragging about in their constituent newsletters. Would Milton Friedman laugh or cry?

Likewise, the governor’s proposal to sell off the ABC liquor monopoly was spiked. Why should the General Assembly let private industry in the door when it now gets to spend the profits from the monopoly? Why not milk that monopoly further by raising prices even higher? Which, of course, is exactly what it did.

None of this settles the argument about whether Virginia ought to raise taxes. But we should start that debate with a discussion of whether increasing spending $4.3 billion in a single budget cycle is still inadequate, and if so, why.

-- March 17, 2003

Bring Home the Bacon

Stephen D. Haner is vice president for public policy with the Virginia Chamber of Commerce. You can can e-mail him at s.haner@vachamber.com