The Real Deficit: Credibility

Over the last several years we’ve all been repeatedly told that looming state budget deficits require radical changes in Nevada’s tax system.

Massive new evidence, however, suggests that what we’ve been told was—not to put too fine a point on it—simply untrue.

Rather than deficits requiring a new tax system, it now appears that it’s the political goal of a new tax system that’s been behind largely bogus portraits of “looming state budget deficits.”

Such a claim may seem excessive, but the evidence is overwhelming. And this evidence emerges repetitively, with ever-increasing force, the longer one inspects the state budgets proposed by Gov. Kenny Guinn and his Task Force on Tax Policy.

For example, Gov. Guinn told Nevadans in his January State of the State message that the state was facing a budget deficit for the 2001-2003 biennium of $300 million. In March, however, when the administration’s own budget division released its numbers, the estimated general fund shortfall turned out to be only about half the governor’s figures—$155.7 million.

Even at that figure Guinn and the Legislature were still spending more than 6 percent over the previous, 1999-2000, biennium when adjusted for inflation and population growth.

Indeed, of the $155.7-million revenue shortfall, 75 percent, or some $116 million, was new spending—expansion and “enhancements” of existing programs. Thus the real budget gap for the current biennium was only some $39.7 million—chicken feed for two years that contained both 9-11 and the Iraq war.

Now the governor is seeking to permanently increase state tax levels by 41 percent. To justify this he and his task force have coupled highly inflated estimates of future revenue needs with extremely pessimistic estimates of future revenue growth. Thus the huge budget “shortfalls.”

But close inspection of the assumptions on which the governor’s estimates rely shows that these assumptions have little credibility. Not only do they ignore recognized, responsible and transparent methods of making economic projections. The assumptions also often ignore existing available empirical data.

Consider, for example, the baseline, or standard, the governor’s task force selected for estimating future revenue needs. It was the very rich budget for the current biennium that Guinn and lawmakers approved at the end of the 2001 Legislature—a budget that increased spending over the prior two-year period by nearly 20 percent. It was also a budget that lawmakers passed while still oblivious to the oncoming—now current—economic recession.

Had the task force selected a more reasonable baseline—say, the budget for the 1999-2001 biennium, increased for inflation and population growth—the deficit projected for the next 10 years would drop by nearly half. From $4.57 billion, the figure would decline to only $2.43 billion.

But there are major problems with the governor’s numbers beyond the baseline chosen.

The governor and the task force get into serious trouble when they estimate future demands on state services—school enrollment (both college and K-12) and requirements for Medicaid and other welfare services. Everywhere the administration assumes that growth in government services must significantly exceed the rate of population growth.

For example, the governor estimates that university and community college enrollment will increase by 9.4 percent in 2004 and by 6.1 percent in 2005. But those numbers lack any historical support. For 2002 student population increased only 2.7 percent. And the same increase is expected for this year.

Similarly, the governor assumes that K-12 needs will grow by 4.03 percent over the coming fiscal year and 3.56 percent the year after that. But these estimates exceed not only those from his own state demographer but also the U.S. Department of Education. And the discrepancies are never addressed.

Similarly serious problems afflict the assumptions on which the governor and his task force built their estimates of future revenues from existing taxes. Between 1989 and 2001 the state reaped a compound annual increase in general fund revenue of 7.3 percent. Yet the task force estimated a compound annual increase over the next 10 years of only some 3.9 percent.

As two eminent Nevada economists recently observed, “It would take an extraordinary state of affairs, such as a decade-long recession,” to reduce revenues to the levels projected by the governor’s task force—“a level below even the most depressed year of the 1990s.”

In its January tax study, NPRI observed that politicians love computer-forecasting models. The reason? “Given the right data set and the right formulas,” the study noted, “models can be structured … to predict whatever ‘future’ is desired.”.

Steven B. Miller is policy director for the Nevada Policy Research Institute.