Jewish World Review July 17, 2000/ 14 Tamuz, 5760
http://www.jewishworldreview.com -- THROUGH THE FIRST QUARTER of 2000, the combined state and local surplus was $60 billion according to the U.S. national income accounts. When added to the $200 billion Q1 federal surplus, U.S. governments are generating a whopping $260 billion total surplus, amounting to 2.8% of gross domestic product.
So imagine how shocked I was at the lead story in Monday's USA Today, which headlined "States bracing for leaner times." It was early in the morning, and my still-groggy eyes connected to my still-sleepy head that the article must be talking about former Soviet states, or perhaps Italian municipalities or maybe someplace in Central America.
But no, the article spoke of U.S. states. And the lead quote from Republican Utah Governor Michael Leavitt -- America's leading Internet tax-grabber -- asserted that "The perception that somehow the states are awash in cash is not just a misnomer but an injustice."
Yea, right. An injustice. State and local spending growth over the past five years has averaged 5% annually, a pace that is nearly twice the inflation rate and half again as fast as Uncle Sam's federal outlay rate of 3.3%. How unjust. These are taxpayer dollars.
In Mr. Leavitt's Utah, by the way, a high 7% top state income tax-rate, along with a 4.75% sales tax-rate, left the state as the 13th most tax-burdened in the nation, where total taxes as a share of personal income is 8.3% (versus a 7% national average).
I rather preferred the quote from Vermont Governor Howard Dean, a Democrat, who said "It's really hard to make a case that the increase in spending has done anything." My kind of guy.
According to the USA Today article, the percentage of Americans without health care insurance climbed 16% in the '90s despite substantial spending on health issues. Pupil-teacher ratios rose only 4% and college test scores just 2%, despite an 18% spending increase on elementary and secondary education and a 10% jump in spending for colleges and universities.
And remember, because of the federal welfare reform bill, the welfare population in the '90s has plummeted to 6.6 million from 14.4 million. This should have been a big cost-cutter. But apparently spending was reallocated to other places. Another potential cost-cutter: Medicaid cost increases have slowed to only 5% from the 20% pace in the early 1990s.
Leavitt and other governors complain that revenue growth has been dampened by the tax moratorium on Internet sales. But this is really a non-starter. As a share of total retail sales, cyberspace transactions make up less than 1%.
So I really agree with Cato Institute economist Stephen Moore, who told USA Today "These governors are just big spenders . . .. It's not just liberal Democrats."
Fortunately, there have been numerous state tax cuts. Minnesota, Illinois, Pennsylvania, California and New Jersey among them. In New York, Republican Governor George Pataki has cut taxes for six years, dropping the Empire State from 22nd place to 35th place in the state tax burden derby.
It's also worth noting that as New York (and New Jersey, where Christine Todd Whitman made good on her tax-rate reduction plan) lowered tax-rates, economic growth and tax receipts both increased substantially. In other words, the Laffer curve works at the state and local level as well as nationally.
Speaking of nationally, the growing prospect of a $250 billion FY 2000 budget surplus is prompting what could turn out to be a very nice pro-growth tax-cutting package in this session of Congress. The Investor Class is driving the polls, and House and Senate members surely read the polls.
The last tax-rate above 50% is the inheritance tax, first put in place 84 years ago by President (and former New Jersey governor) Woodrow Wilson. Today, the House has actually passed a repeal of the so-called death tax, and favorable Senate action is likely.
President Clinton, playing the usual class warfare card (supply-sider Jude Wanniski calls it "reverse Robin Hood" ), threatens to veto an estate tax-cut. But that old-time soak-the-rich rhetoric just doesn't play well politically anymore. Al Gore out there on the campaign trail trashing drug manufacturers and oil companies is learning the same hard lesson.
There's also a good possibility that IRA super-saver accounts will be expanded, and the marriage penalty will be repealed. There might even be a gasoline tax-cut.
My friend and mentor Arthur Laffer called the exploding federal budget surpluses "a tax-cut inventory" at dinner the other night. He's exactly right.
Surpluses should be returned to the private economy that produced them. And if tax cuts are done efficiently by reducing marginal rates, then rising after-tax returns will rejuvenate economic incentives, leading to faster growth and rising revenues.
Federal, state and local citizens unite! It's time to turn surpluses into
JWR contributor Lawrence Kudlow is chief economist for CNBC. He is the author of American Abundance: The New Economic & Moral Prosperity. Send your comments about his column by clicking here.
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