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Wed, 07 Nov 2007
The state budget: choosing a crisis
[Appeared last week in the Woonsocket Call, Pawtucket Times, etc.]
In 2006, when the legislature passed its tax cap for rich people (also known as the alternative ``flat'' tax), they did it without saying what services would be cut to pay for it. The way the tax cut game is usually played, the cut has to be phased in over several years, leaving. the harsh spending decisions to some future legislature. Naturally we're all supposed to pretend not to notice how cowardly it is to propose a tax cut without saying what will be sacrificed to pay for it. Are you in favor of lower taxes? Put that way, who isn't? Where it becomes hard is after we understand what we're giving up.
In this case, the phase-in strategy is especially nasty because the cuts get successively more severe each year. The way the cut works is this: taxpayers can choose between using the tax tables you and I use to calculate our taxes, or using a flat percentage of taxable income. Because of the way our income tax is structured, only the richest taxpayers will save any money by choosing the flat tax. Starting in 2006, the tax limit ratchets down by half a percentage point each year, until it rests at 5.5% in 2011. As of this coming year, the limit is 7%, so it affects married taxpayers earning more than around $260,000 per year.
Another exciting feature of this cut is that it was made on the basis of false estimates of how much it would cost. The Tax Division declined to provide projections about the cost in future years. Instead, they provided an analysis of 2005 income tax data that showed what the cut would have cost in that year. This is not the same thing, but it's all they could be persuaded to do. By their count, when fully phased in, the cut would have been worth $73.1 million, in 2005.
But incomes grow over time, and at this point in 21st-century America, the evidence mostly shows that incomes at the top end are growing faster than incomes at the bottom. In other words, this number can't possibly be a good estimate of how much the flat tax cut will cost. Unfortunately, because there were no other numbers available, legislators and advocates seized on these, and in speeches and in discussions, you'd hear them speak as if this were the true cost.
Projections aren't that hard, though like any prediction of the future, you have to remember to be humble. Using income growth statistics and past tax data to simulate half a million taxpayers like ours, I wrote a computer program to fill out an imaginary tax form for each of them. This used to be the kind of number-crunching that could only be done by government researchers and others who could command lots of computer horsepower. But one of the great things about the march of technology is that any computer with enough oomph to run World of Warcraft has the speed to fill out a measly few hundred thousand tax forms, and I only played a couple of Freecell games before it was done crunching through them all. It gave good results for past years, so then I asked about the future. The predictions that burped out showed the tax cut will cost $27 million in fiscal 2009, an increase of about $12 million from this year. But in 2012, when it's fully phased in, it will cost around $110 million. This is a lot of money to be giving back to rich people in a state where no music teacher is safe.
This year, you're going to hear a lot of people say we shouldn't raise taxes to balance the state budget. Those people are trying to mislead you by ignoring the fact that the biggest reason our state budget isn't in balance is the huge tax cuts we've given and are still giving. If we were to magically transform the income tax back to the rates of the bad old days of 1996 -- reversing the 1996 capital gains cuts, the 1997 Almond income tax cuts, the 2001 capital gains cuts and the 2006 flat-tax cuts -- we'd be collecting over $200 million more than we are expecting next year, and that's only the cuts in the income tax. By itself, restoring these cuts wouldn't be a particularly good idea, since property taxes have shot up to take the place of the lost revenue, but it gives you a good idea about how we got into this mess: we chose it. It was the completely predictable result of conscious policy decisions made by people in charge. Ten years ago, I asked Michael O'Keefe, then as now the guy in charge of fiscal advice to the House Finance Committee, how on earth he thought we could afford the tax cuts the committee was about to pass. His reply: "The Chairman [then-rep. Tony Pires] feels that the state would benefit from increased fiscal constraints in future years." Well here we are.
I know what you're thinking: taxes are taxes and it's a darn good thing we did cut them. But there are very important differences between income taxes and property taxes that won't fit in the rest of this column, so I'm going save that for next week. In the meantime, consider this: Maybe you think these cuts are all necessary. Maybe you don't. Either way, does that mean we should pretend they didn't happen?
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