Band-aids don’t fix broken bones
If anything became clear in the recently concluded 26th Special Session of the Nevada Legislature, it is that during the 2011 regular session debate will center around one highly contentious issue: taxes.
During the 2009 regular session, lawmakers were able to lean on federal stimulus funds and a variety of new taxes — on the order of $1 billion — in order to once more evade the need for fundamental fiscal reform. The 26th Special Session saw lawmakers again apply a patchwork of band-aids to the budget they passed 10 months earlier, including: $314 million in spending reductions, $197 million taken from secondary state accounts, $117 million in new revenues and fee increases, $105 million in federal funds and a variety of fund transfers and other accounting gimmicks.
Apart from the specific provisions passed during the special session, the broader story is the continuing need for fiscal reform and what that reform should look like. Current legislative leadership appears to agree that fiscal reform should be the center of attention, but has, so far, placed all focus on the revenue side and none on spending controls. Senate Majority Leader Steven Horsford has proclaimed, "Revenue reform is at the top of the agenda for 2011. It is THE agenda."
Indeed, Horsford and his colleagues on the Interim Finance Committee have already begun work on "the revenue side." They commissioned a comprehensive study of the state revenue structure from Moody's Analytics and explicitly directed that it "review proposals for broad-based business taxes." That study and its predetermined recommendation will be used disingenuously by some lawmakers as the academic rationale for levying a new corporate income tax or gross-receipts tax on businesses. As Horsford made clear in his recent response to Governor Gibbons' State of the State address, he wants to "ensure all businesses, banks and big corporations, pay their fair share."
From all indications, it appears that Horsford's drive for "revenue reform" is less rooted in concern for tax equity or stability and more the result of a simple desire for additional loot. Why else would Interim Finance have directed Moody's to consider, in its recommendations for new taxes, recommendations for additional spending from a new stakeholders group composed primarily of tax-dollar recipients?
What the recently concluded special session should have made clear is that the state can't solve its problems simply through "revenue reform." Lawmakers should devote the 2011 session to comprehensive fiscal reforms that include the spending side.
The shortfall between expected revenues and planned spending that the special session was called to address resulted primarily from unsustainable spending increases over the past six years. If legislators had maintained inflation-adjusted, per-capita spending levels from the 2003-05 budget cycle, they would have crafted a $5.3 billion budget for the current cycle and they would have faced no shortfall. Instead, lawmakers increased inflation-adjusted, per-capita spending by 31 percent between the 2003-05 budget and that of 2009-11. Indeed, despite spending cuts made this special session, spending will still increase by 25 percent. Clearly, it is lawmakers' new spending over the past six years that has led the state into fiscal distress.
There is little doubt that if lawmakers remain free to unrestrainedly increase spending at such alarming rates over such short time spans, the state will always face fiscal turmoil — no matter how the revenue base is structured. Very basic arithmetic dictates that Nevada will inevitably face shortfalls when lawmakers spend beyond revenues — regardless of their relative sizes. This special session is yet another testament to this fact.
Heading into the 2011 session, responsible elected representatives will want the focus to be on reforms that restrain future spending growth and prevent such ugliness from reoccurring. A Tax and Spending Control-like provision that would limit the growth in spending to inflation plus population growth should be a key element in any comprehensive "fiscal reform."
Without such a cornerstone, the more narrow vision that focuses exclusively on revenues will never be adequate to prevent future crises.
Geoffrey Lawrence is a fiscal policy analyst at the Nevada Policy Research Institute. This article first appeared in the April 2010 edition of Nevada Business. For more information visit http://npri.org/.