December 06, 2006
Today's Budget "Surplus" Does Little for the Future
A December 3rd Star Tribune column by Katherine Kersten, "Well-heeled Gang of 200 gets schooled in economic reality by Gov. Pawlenty," contains some misconceptions about the state budget and the relationship between lower taxes and revenue. Joel Kramer responds:In her attack on people who support higher taxes on high earners to support additional investment in our state’s future, Katherine Kersten repeats the old canard that lower taxes create more government revenue. Even current and former Bush economic advisers, as well as the nonpartisan Congressional Budget Office and the Treasury Department, have stated clearly that Bush’s tax cuts have not created more revenue. Robert Carroll, Treasury’s top tax analyst, said recently, “As a matter of principle, we do not think tax cuts pay for themselves.” In fact, during the last three economic recoveries, federal revenues grew much faster in the 1990s, after taxes were increased, than they did in the 1980s or in this decade, after taxes were cut. At the state level, Kersten says that people who think government is not adequately funded “got their wish” when the state announced its $2 billion surplus. This shows her ignorance of state finances. This year’s $1 billion surplus is one-time dollars, which should not be invested for long-term purposes like educating our kids or improving our transportation system, because they are non-recurring. The other $1 billion over the next two years is not really a surplus at all, once you account for inflation in the price of the labor and goods that governments must buy. If you are earning $50,000 a year, would you think that a 2% raise of $1,000 created a “surplus” for you, knowing that the cost of almost everything you buy will rise at least 2%? Using the best estimate of cost inflation for the next two years, the surplus changes into a structural deficit of more than $250 million. So, while Kersten says the surplus did not appear “by magic,” the forward-looking part is based on sleight of hand. Most Minnesotans know that investing wisely in our children’s education and health, and in reducing gridlock on our roads, will create more prosperity. We must return to our tradition of being willing to pay – and those who can best afford it (and who currently are not paying their proportional share) should pay the most.
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