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Dot.Gov
Bubble Bursting
General
Assembly money committees find out again this week
what the private sector learned the hard way three
years ago.
Both
the Senate Finance Committee and the House of
Delegates Appropriations Committee hold retreats
this week and the sound of the dot-gov bubble
continuing to burst won’t be pleasant. As the
American economy improves, state revenue
projections may be up a healthy five or six or
seven percent, but spending projections for
education, tax cuts, Medicaid, rebuilding the
rainy day fund to satisfy Moody’s and everything
else state government does will rise faster. The
deficit projected for FY2005, which begins July
1, 2004,
therefore, will be in the range of $1.5 billion.
How
can this happen, one might ask, given that the
General Assembly and Gov. Mark R. Warner have
collaborated in cutting almost $6 billion from
spending plans in the last two years? The answer
lays in the lessons the private sector and its
dot-com rule-breakers learned the hard way three
years ago – income matters more than burn rate,
an enterprise in trouble cannot cut its way to
profitability and critical changes to boost
revenue are best made as quickly as possible.
It’s
small comfort that Virginia
is not alone among states with budget problems.
Groups that look at state government fiscal
matters at the macro level, such as the Center on
Budget and Policy Priorities in Washington,
D.C.,
project another $32 billion in revenue shortfalls
in FY2005 across all states on top of an estimated
$78 billion revenue shortfall right now. Why? The
Center concludes the main cause of the state
fiscal crisis is flagging state revenues. How bad
is it? State taxes now make up a smaller share of
the economy than at any time in the last 25 years,
despite 29 states raising some taxes (some with
Republican leadership, some with Democratic
leadership and some in a bipartisan fashion).
By
the end of the week, the membership of the Senate
Finance and House Appropriations Committees will
have shed the last illusions that Virginia
has weathered the budget storm and can look to
some smooth sailing. One and a half billion
dollars is a big gap. Questions will remain,
however, as to who will lead in tackling the
revenue problem after the briefings conclude
November 21.
The
senate seems most predictable, of course, simply
because its Republican Senate Finance Committee
leadership also runs the senate and chairs other
major committees. What you see from Senate Finance
is what you get. For his part, Gov. Warner
artfully has negotiated, presided over, managed
and administered budget adjustments almost
continuously for his entire term. But even his
closest supporters wonder whether or not Warner
will use Thanksgiving week not to manage downside
risk, but to stake his governorship on a bold
budget plan that includes, even requires serious
revenue adjustments.
At
first glance, the reaction of the House also seems
predictable. Pre-election remarks on tax reform by
Virginia House Speaker William J. Howell, R-Stafford
-- echoed more recently by Republican Attorney
General Jerry Kilgore -- suggested
Virginia
should neither raise taxes nor reinvent its tax
code in 2004. Whether House Republicans can unite
behind yet another round of wholesale budget
cutting is a real question mark for Republican
Appropriations Committee members and Republican
committee chairmen who never have had an
opportunity to deliver the goods since seizing the
majority from the Democrats in 1999.
But
there is more to the discussions than the trench
warfare between pro no-tax, anti no-tax forces.
Speaker Howell also used his pre-election remarks
to suggest moving budget and policy discussion
onto more fertile ground, toward correcting what
Howell called “the most pressing structural
imbalance facing Virginia today … the imbalance
between state and local resources and
responsibilities.”
Rather
than continue to gridlock on the philosophy of
taxes and spending, the speaker suggested the governor
and General Assembly consider two long-term
strategies for relieving fiscal pressures on local
governments: supplementing local school
construction and renovation funds with state funds
and sharing state income tax revenue with the
localities that generate them. While state
revenues were doubling the in 1990s, Howell noted,
local governments dependent on property taxes did
not enjoy comparable revenue growth. Yet, local
obligations for schools, transportation and other
supportive infrastructure did grow sharply in
parts of the state.
True
to his conservative nature, Howell did not propose
immediate funding solutions, preferring instead to
reference “when circumstances permit in a year
or two.” One suggestion is to rebuild and
dedicate Literary Fund resources (from fines,
forfeitures, unclaimed lottery prizes and
miscellaneous receipts) to leverage a $1 billion
bond issue for K-12 school construction. This step
alone, Howell maintains, would relieve taxing
pressures localities face without laying the
state’s general fund wide open with
unsustainable new annual spending commitments.
Similarly,
Howell suggested his fellow policy-makers consider
a state income tax revenue-sharing program in
which a portion of the growth in income tax
receipts flow back to localities where the
receipts originate. Something along those lines
now happens with a portion of the state sales tax
and it is an option that has been recommended by
past tax study commissions.
Del.
Joe T. May, R-Leesburg, and then Loudoun County
Board Chairman Dale Polen Myers pushed a bill to
return a percentage of growth in state income
taxes to localities through a lot of hoops in the
General Assembly in 1999 before it was laid aside
in the Senate Finance Committee. Similar proposals
in subsequent years have been shunted into
unending studies.
Forgoing
“tax reform” in favor of real progress on
rationalizing state and local government revenues
and responsibilities is not something governor,
senators or local officials should dismiss out of
hand. There still is no consensus on the nature of
the tax problem -- Howell’s speech is Exhibit A
--
much less on which among the thicket of solutions
offered up by a decade of studies can command a
majority vote in the charged atmosphere of the
General Assembly session. There is a consensus,
however, that local governments are in “an
untenable position,” in Howell’s words, with
“too many responsibilities and too few
resources.”
To
illustrate the potential in finding a solution to
that problem, one need only review the
post-election comments of the new Chairman-elect
of Fairfax
County’s
Board of Supervisors, Gerry Connolly. Connolly is
a pro-business, moderate Democrat who had pledged
to use his position in the state’s largest and
richest locality to accelerate school construction
and rehabilitation, gain more sources of revenue
to reduce dependence on property taxes and create
a “new social compact” between the
Commonwealth and localities on core
responsibilities and funding. Sound familiar?
All
in all, Speaker Howell, as commander of the
Republican majority in the House of Delegates, is
sending a powerful signal about the essence
of politics – the art of the possible. Whether
“wait, borrow and share” resonates louder than
the bubble bursting before House and Senate money
committees this week or the revenue plans of the
Governor next will be at the heart of decisions
ahead for House Republicans.
--
November
17, 2003
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