Step away from the scissors?

Two hundred economists from 37 states–including the University of Tulsa’s Steve Steib have joined the rising chorus of voices cautioning states against solving short-term deficits by cutting budgets and public services.  They’re urging states to:

Maintain the public services that are critical to the health of the economy and the well-being of working families. Cutbacks at this time would further slow the economy and harm those already hardest hit by the downturn.

Budget cuts make the economic downturn worse, they argue, because almost every dollar of state spending–whether for salaries, supplies, or assistance–hits the local economy immediately. So budget cuts equal less overall spending, which equals an even weaker economy. The damage could be as bad, or worse, over the long run since the services state and local governments invest in–education, transportation, public safety, and a stronger social fabric–are essential to the long-term economic health of the state and the nation.

The economists argue that raising taxes is a better alternative to budget cuts. Tax increases also cut spending in the local economy but by a much smaller amount, since upper-income taxpayers don’t spend all they earn.

In our view, it is too simplistic to look at only two choices–cutting budgets or raising taxes. Each state should consider these options as well as others–using rainy day funds that were collected in better years and borrowing, not to plug budget holes but, to stimulate the state economy through construction and other investments.

In Oklahoma, legislators are wrestling with a shortfall of at least $600 million for the upcoming fiscal year 2009-2010. The budget hole should be smaller thanks to federal stimulus money. Our budget outlook is better than most. Tax increases may not be necessary and will not receive serious consideration. Only budget cuts are on the table at this time. House Speaker Chris Benge warns that all agencies can expect some cuts. Interestingly, tax cuts are still under discussion. The rainy day fund is full but the governor and legislature don’t want to touch it since it may be needed later.

The economists join Nobel laureate Paul Krugman, who warned in the New York Times that the states have the potential to be “50 Herbert Hoovers” with the power to undermine the federal stimulus package and prolong the downturn through badly timed and excessive budget cuts. We hope Oklahoma leaders keep this in mind as they face the tough choices over the coming weeks.

ABOUT THE AUTHOR

Paul Shinn

Paul Shinn is a Budget and Tax Senior Policy Analyst with OK Policy. Shinn has held budget and finance positions for the Oklahoma House of Representatives, the Department of Human Services, the cities of Oklahoma City and Del City and several local governments in his native Oregon. He's also taught political science and public administration at the University of Oklahoma, University of Central Oklahoma, and California State University Stanislaus. While with the Government Finance Officers Association, Paul worked on consulting and research projects for the U.S. Environmental Protection Agency, the U.S. Department of Transportation, and several state agencies and local governments. He also served as policy analyst for CAP Tulsa. He holds a Ph.D. in Political Science from University of Oklahoma and degrees from the University of Oregon and the University of Maryland College Park. He lives in Oklahoma City with his wife Carmelita.

3 thoughts on “Step away from the scissors?

  1. Good to see a new name on the blog in addition to the other great ones!

    I was thinking about the Tax Increase vs. Spending Cuts question today. It seems you are right on. You talk about borrowing, but isn’t Oklahoma not allowed to have a deficit?

    1. Thanks, Chad. You are correct that Oklahoma (and 48 other states) can’t run an ongoing operating deficit. Some states go ahead and borrow to pay for capital costs (roads, buildings, endowed chairs at universities) that might otherwise have been paid from general revenues. That frees up scarce revenues to pay for the services we need. it’s not always the best solution or even appropriate to all , but it can both stimulate the local economy and keep us from cutting services we rely on.

  2. Frankly, even as someone who had to pay what I consider a large sum of money to the state for capital gains this year, I am sick to death of hearing about tax cuts, regardless of the state’s budget health. No one in this state really knows what high taxes are compared to other parts of the country and the world. And, ultimately, Oklahoma gets what we paid for which is why so many people find this the last place on earth they would want to live. But then I was born and (mostly) raised here, what would I know?

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