A Sure-Fire Plan to Lower Spending

December 20, 2010

For release noon Dec. 21 and thereafter (660 words)

Even as other states face “a fiscal crisis of unprecedented severity” – to quote the Center on Budget and Policy Priorities – Gov. Mitch Daniels is crafting a plan to give taxpayers their money back.

Not this year or next, to be sure. But if and when the economy improves and the state’s structural spending deficit disappears, Daniels wants to make sure lawmakers don’t resume their spendthrift habits.

Daniels’ 2011 legislative agenda calls not only for a balanced budget without a general tax increase but a state government spending cap in the form of an automatic taxpayer rebate.

It’s a creative proposal that avoids the pitfalls experienced by other states that have attempted spending caps, such as Colorado where a constitutional spending formula has created a permanent deficit and resulted in significant deterioration of public services.

Under Daniels’ proposal, lawmakers would be empowered but not required to keep spending down and taxpayers would reap the benefits when reserves hit a comfortable target – say 10 percent of the annual budget.

Daniels looked at what other states had tried before settling on this approach. “One of the problems that I saw in other states was they let the perfect be the enemy of the good …

The idea here is very neat and clean.”

Daniels boiled it down to this: “After government has (achieved) a balanced budget and a savings account to protect it, you quit collecting money. Just leave it with the folks who earned it. That translates, I think, into a very good spending limitation because it gives the legislature an incentive to stop spending: ‘if we can discipline our spending so that we hit that target everybody in my district gets a rebate.’ ”

Without such statutory encouragement, there is nothing to stop lawmakers from spending, Daniels said. “Remember when we had a $2 billion surplus? We spent it.” Another advantage of the plan is it reduces the need for lawmakers to routinely debate tax cuts and tax hikes to accommodate economic upturns and downturns.

Daniels will propose a 10 percent reserve before the rebate is triggered, which is about what Indiana had when the current recession hit. As a result of that healthy cushion, Indiana has weathered the economic downturn better than other states, despite higher unemployment.

In fact, the Dec. 15 revenue forecast projects a 3.5 percent revenue increase in fiscal 2012 and a 4.1 percent increase in 2013. That would bring tax receipts to just about where they stood five years ago – enough, says the Daniels administration, to craft a biennial budget without a tax hike and without any cuts to K-12 education spending. In contrast, most states expect fiscal 2012 to be more challenging than 2010 or 2011, according to the Center on Budget and Policy Priorities.

If Daniels can sell his idea to a friendly Republican legislature, he will have given Hoosiers two meaningful long-term protections from prodigal spending for when the economy starts to grow again: a permanent property tax cap written into the state constitution last November and a potent spending deterrent for the future.

Better yet, neither of these provisions tie policymakers’ hands, which has been the rap against such proposals elsewhere. In the case of the property tax amendment, there is an escape valve so local governments can go directly to the voters for permission to raise more money. Likewise, the tax rebate idea would retain with lawmakers full discretion to raise spending to create new programs or services should it prove necessary down the road.

“Next to being shot at and missed, nothing is really quite as satisfying as an income tax refund,” said the humorist F. J. Raymond.

Refunding taxpayers money is always a good thing, but that’s not the biggest advantage to the Daniels plan. The point is to deter extravagant spending that inflates government budgets when times are good and forces steep cuts – or worse yet, tax hikes – when times are bad.

Andrea Neal is a teacher at St. Richard’s Episcopal School in Indianapolis and adjunct scholar with the Indiana Policy Review Foundation. Contact her at aneal@inpolicy.org.


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