Taxes and Spending—No Limits?

Dennis Schiffel

Amid much acrimony and embarrassing bureaucratic maneuvering the Nevada legislature in its last session passed the biggest spending and tax plan in state history. The public was not pleased. Grumbling and legal wrangling in the courts continue.

Lo and behold, more new taxes are being proposed:

  • Clark County Commissioners have approved an advisory ballot measure to raise the sales tax by one-quarter percent for four years starting in 2005 and then to raise it indefinitely for increased police.
  • The Nevada University System’s Board of Regents has proposed a 6 percent increase in the state construction property tax rate to raise $113 million.
  • The Regents want a $200-million college building program to be funded with bonded debt—which would have to be repaid with future tax revenues.
  • The state teacher union has a proposal on the upcoming ballot to raise state education spending to a vaguely defined “national average”—with a consequent tax and spending price tag in the hundreds of millions of dollars.

Homeowners will likely find the assessed value of their homes rising; real estate tax bills will rise as a consequence. And other supplicants for taxpayers’ money will likely be coming forward.

These budding tax and spending increases entirely ignore last year’s furor over increased taxes. As well, these proposals would mean further fiscal balkanization. Dedicated taxes reduce the flexibility to apply tax revenues to the highest and best uses. Second only to unrestrained public spending, such balkanization is a major contributor to California’s budget problems.

Clark County Commissioners’ approval of the police tax advisory ballot is troubling. They should be examining the merits of the requested increase and alternatives to it—and making recommendations. Isn’t fiscal management a key responsibility of elected officials?

The education initiative is even more pernicious. It would reduce, if not entirely eliminate, local control over the level of spending for education—as well as result in higher taxes and more balkanization.

And, who would benefit from the increased education spending? Certainly educational establishment special interest groups: administrators, teachers, and union officials—among others. Would students benefit or would educational results improve? Highly unlikely: Many years of increased educational spending throughout the U.S. have resulted in virtually no improvement in educational results. Educational spending is just one of many factors, and not the most important, in educational outcomes.

Even scarier than current tax-and-spend proposals are existing unfunded commitments for future spending. Social Security and Medicare are prime examples. Trustees for the programs project that already promised future benefit payments exceed expected revenues by $72 trillion dollars. Either large tax increases or program defaults or both are inevitable.   This same problem exists with promised pension benefits in numerous jurisdictions. Politicians indifferently create future spending commitments and yet fear to address the consequences.

Looking at taxes in a larger context, it is almost a law of nature that politicians and bureaucrats will spend all tax money allocated to them. As a corollary, they will invariably argue that they need to spend, and tax, more. We also know that special interest groups ply elected officials for spending favors. Lobbyists operate behind the scenes seeking favors that the general public must finance. Government spending programs seldom, if ever, are abolished or reduced in size.

It is unlikely that politicians, bureaucrats and special interest groups will change their behavior. Yet, changing the institutional rules of the game can improve matters.

For Nevada, useful fixes for these problems would be first, an integrated comprehensive state budget and second, bipartisan institutional change to impose binding limits on tax and spending increases. These limits are especially important. Annual spending increases could be limited to the rate of inflation plus the rate of population growth. Tax increases could be limited to the percent change in the rate of inflation, allowing real tax revenues to grow with the state economy.

Such changes would slow the growth of spending and taxes. Equally important, it would force more attention to some critical issues:

  • The necessity and efficiency of various government expenditures,
  • Tradeoffs among government spending goals,
  • Scrutiny and restraint of special interest groups’ requests, and
  • Long-term fiscal planning.

Similar reforms would be useful at the local level. Can it be done? Colorado’s limits on state spending provide a model, and experience, on which to build. With spending and taxes, it is important to do something before the fact—rather than complain afterwards.

Dennis Schiffel is a former senior associate at the National Science Foundation and a policy fellow of the Nevada Policy Research Institute.