Cutting Taxes, Cutting Reserves: Managing Florida’s Fiscal House

Cutting Taxes, Cutting Reserves: Managing Florida’s Fiscal House

Governor Scott’s announcement of his proposed budget for 2016-17 continues the theme of his entire gubernatorial career: targeted state tax cuts and spending to generate jobs. While not everyone might agree that what he has proposed, in the past or for this next fiscal year, actually is best for job creation, those remain his priority initiatives.

I almost always find myself concerned about tax cut recommendations. I’ll confess that this is due, in part, to what I take to be a fairly fundamental difference in perspective. Many public officials seems to start from the premise that there should always be a tax cut. I start by asking whether the government in question (whatever government it is) has the revenue it needs to do what the citizens of that government want and need that government to do.

I also am concerned that we seem to cut taxes when tax revenue surges and then cut services when it shrinks . . . often at the expense of our most vulnerable residents.

There is an alternative view of the proper management of fiscal policy. That alternative model suggests that you don’t cut taxes when the economy booms. Instead, you keep on collecting, knowing it is a surplus over and above what you need to operate. You collect it, but you don’t spend it. Instead, you accelerate the payment of debts owed and you build up reserves.

When the economy turns sour, as it invariably will at some point, that’s when you cut taxes, striving to soften the impact of the economic decline on businesses and families so that they can weather the financial storm. That’s also when you make a point of not cutting services. Instead, if anything, you increase spending on core services that provide a safety net and help families and businesses recover economically, spending down the reserve you accumulated in the good times.

Measured in terms of tax receipts, Florida’s economy is going strong (numbers). Revenue growth has accelerated in the last fiscal year, after a downturn during the recession and a slow recovery in the years immediately following.

state of florida total state tax revenue

(Data compiled from Florida Department of Revenue.)

At the same time, fifty percent of our households are at risk, either because of unemployment or because of low wages and/or underemployment. So an argument might be made that either this is a time to keep gathering tax revenue (because the economy is strong) or to cut taxes (because families are struggling). I’ll grant that there are good arguments on both sides.

But to the extent that we might wish to implement the “save now to be able to pay later” model, it seems clear that current policies are pointed in the wrong direction. Even as the economy has recovered, our reserves have diminished, both in absolute terms and in terms of the number of days we could keep operating on reserve funds.

Before the Great Recession, we were building reserves (consistent with the model I’m suggesting). Just before the bottom dropped out on the economy, we had $6.1 billion in reserve, enough to run the state government (then) for nearly three months. (The election year budget that followed substantially reduced that reserve, but still left us with $4.7 billion – two months’ worth of reserves).

When the recession hit, we spent down the reserves even further, just as the model would suggest. But with the economy recovering, we should be building it back up. Yet, for the last two fiscal years, we’ve been depleting the reserves, both in simple dollar terms and in days we could run the state. The estimate for reserves at the end of fiscal 2015 is $3 billion, just over five weeks:

days each state could run on reserve funds graph

http://www.pewtrusts.org/en/multimedia/data-visualizations/2014/fiscal-50#ind5

I’ll acknowledge that Florida is in a better position vis-à-vis reserves than the vast majority of states. But it also is true that Florida, while we have been blessed with several years of relevant meteorological peace, only needs one bad year (or even one bad storm) to find our financial resources taxed in the extreme.

So . . . tax cuts? Perhaps. If cutting taxes actually generates more good paying jobs for our residents, that may be the right call.

But the state also has a job to do, partnering with our local communities to educate our children, protect our citizens, look out for the vulnerable, preserve our natural treasures, as well as fostering economic activity. Tax cuts, however attractive they may sound, ought not to cut those services to the bone.

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