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Wednesday, October 21, 2009

Taxing 'Rich' Won't Solve State Budget Shortfall

By Jonathan Lesser
Continental Economics
      In an Oct. 18 op-ed column, Sen. Dede Feldman, D-Albuquerque, called for increased taxes on the wealthy to help solve the state's budget crisis. She also said, “Economists are clear on this: cutting state spending … is the worst thing to do during a recession.” As an economist and small-business owner, my response is that Feldman is wrong on both counts.
       Let's begin with state spending. Feldman says “money must be pumped into the economy.” The problem is that state spending does not pump money into the economy, as if that money dropped from Heaven. Rather, the state collects money from taxpayers, which they could otherwise spend as they chose, and then spends those tax dollars as politicians see fit. Thus, the state simply transfers dollars from one pocket to another. That does not grow the overall economy. The only way to grow an economy is to put resources to their most productive use, something government is not designed for.
       Let's take education, which accounts for almost half of the state's $5.5 billion budget. According to Christine Trujillo, president of the American Federation of Teachers-New Mexico, even a 1.5 percent budget cut to education is unacceptable. Really?
       As someone who once worked for state governments in Washington and Vermont, let me explain several common budget tricks. First, whenever a budget cut is proposed for any government activity, especially one as basic as education, advocates will shout that it will mean firing all the math teachers, eliminating sports teams, ending lunch subsidies for poor children and so forth. Program advocates make the public think the most critical programs will be cut, rather than the wasteful ones, in order to deflect any budget cuts whatsoever.
       The second trick is to make it almost impossible for taxpayers to get detailed information on spending. For example, in the Albuquerque Public Schools, how much goes to pay administrators, diversity coordinators and travel to educator conferences? How much is actually spent on classroom teaching? Good luck finding the answer. Nowhere does the APS Web site present a comprehensive budget that breaks down the $800 million it spends. And taxpayers are told there is nothing that can be cut?
       And what about the rest of state government? Is every single activity performed by someone in state government really “essential?” I saw programs, and entire government agencies, that served no useful purpose, other than providing easy jobs for their employees.
       As for increasing taxes on “the rich,” Feldman conjures up images of greedy Wall Street types who sit around all day and count their money.
       The reality is different. Most of the “rich” she wants to raise taxes on are small-business owners like me, who have labored for years to get where they are and still work long hours. If you own a small business, you don't collect a regular paycheck. You don't get any paid vacation or sick leave — it comes straight off the bottom line. You pay all of your medical costs. You pay gross receipts taxes, state income taxes, federal income taxes, Social Security taxes, Medicare taxes, unemployment insurance, workers compensation insurance, business liability insurance and so on.
       Don't get me wrong, I love having my own business. But it requires a tremendous amount of work.
       So how will raising taxes on small business help the state economy? Will raising taxes make small businesses want to hire lots of employees? No. Will it make it easier for me and other small-business owners to invest and grow their businesses? Nope. Will raising taxes help government determine the truly important activities that it must perform, and what can be jettisoned? Not a chance.
       Economics is all about determining how to allocate scarce resources. Business owners do that every day. So do families. It's time for the state to do the same. Like every other state that has introduced higher taxes and surcharges on “the rich,” New Mexico will find itself collecting a lot less revenue than it thinks, and further damaging the state economy.
       When you're in a hole, the first rule is: Stop digging.
       Jonathan Lesser is president of Continental Economics, an energy and economic consulting firm located in Sandia Park.
       

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