A Bill to Create the Perception of Chronically Inadequate Tax Revenues

Two bills appear to be fast tracked for passage and the Governor’s desk even before all the freshman legislators can unpack their office belongings.  The first is long-awaited federal tax conformity to the relief of tax professionals, tax administrators and taxpayers.   The second is a bill (HF35) requiring expenditure estimates in the state forecast to include the rate of inflation.  This was the first bill heard and passed by the House State Government Finance Committee and has now been sent along to Ways and Means for an expeditious hearing next Monday.  A similar Fed Ex treatment can be expected shortly in the Senate.

We have written ad nauseum about this idea over many years critiquing the arguments, exposing some myths, and examining embedded issues.  One question we have never directly addressed is: exactly what does this bill accomplish that current policy doesn’t already accomplish?   

As we have pointed out many times, the idea of “including expenditure inflation in the forecast” is a misnomer.  It’s already included for all to see, contemplate, and factor into budget decision-making as it it absolutely should be. Current policy regarding the treatment of inflation in the forecast arguably checks all the boxes of making the forecast a more effective tool to inform tax and budget decisions while encouraging responsible fiscal management.

So the question arises, what more is accomplished by removing that estimated inflation number and adding it into the line item labeled “Projected Spending"?   The answer has a lot more to do with tilting playing fields and impacting public perception than responsible fiscal management.  

The forecast may be described as a planning tool but functionally it operates in a much more substantive way: the forecast establishes the official starting point or “baseline” for lawmakers to develop a balanced biennial budget.   Advocates continually stress that restoring forecast expenditure inflation would not increase funding or commit the legislature to funding inflationary adjustments.   The appropriate response is 1) of course it wouldn't, and 2) that’s not the problem.  

The problem is you now have a balanced budget decision-making context framed -- and negotiations proceeding -- from a starting point that has fully indemnified all state discretionary spending from inflation.   It’s equivalent to saying, “Lawmakers, you have complete freedom and discretion to make whatever tax and spending decisions are necessary and accommodate whatever inflation adjustment you deem appropriate in the process.   But before you start your deliberations, we need to eliminate $1.55 billion of available resources this biennium to reflect an outcome of fully protecting existing spending from inflation.”  This year with $17.6 billion to play with -- not that big of a deal.   Other years like the last three biennial budgeting sessions - a different story.

This suggests another outcome this bill accomplishes, and why this rather wonky issue is getting so much attention.  We hesitate to impute motives behind proposals, and we are sure many advocates are sincere in their belief that this is the fiscally responsible thing to do.   But it would also be naïve to think that a lot of advocate support isn’t based on the incredibly powerful influence this change would have on ongoing public perceptions of budget conditions and tax revenue adequacy as a result of billions in heretofore available resources no longer existing on paper.