LR-123: Tax Relief or a Job Killer?

If all goes according to a Republican plan, Montanans will vote in November on Legislative Referendum 123, which provides for returning to taxpayers, by way of income and property tax credits, half of any excess balance in the state’s checking account.  By “excess balance” I mean money left in the General Fund at the end of the year, above and beyond what the Legislature projected would be there when it drew up the budget.  LR123 is being challenged in court on legal and constitutional grounds  (you can read about the challenge here),  but nevertheless it sort of sounds like a good idea, doesn’t it? Why should the state sit on a pile of money it apparently doesn’t need and didn’t plan on having? Why not send it back to the taxpayers?

Well, not so fast. The problem is that LR 123 would take away one of the important tools we have to fight job loss when the economy goes downhill, as it did in 2008, and repeatedly before then.

The Great Recession of 2008 resulted from plummeting spending by companies and households, which led businesses to cut production and jobs because markets for their products were drying up. The right policy under the circumstances was to increase government spending, and that was what President Obama did with the 2009 stimulus bill. Unfortunately, the stimulus was not as effective as the President said it would be, and Republican politicians have argued ever since that the stimulus failed.  That’s nonsense: almost every analyst will tell you that the stimulus kept things from getting much, much worse.  And economists like Paul Krugman warned at the time that the stimulus wouldn’t live up to its billing, not because spending would have no impact at all, but because there wasn’t enough of it, given the mess we were in when President Obama took office.

Krugman also points out – and here’s where LR123 enters the picture – that at the same time the Federal government was trying to increase spending, states were cutting back.  They were doing that because in general they are required to balance their budgets. When the economy tanks and tax revenue falls, states have to cut spending, which just makes the collapse and job loss worse. In short, requiring the budget to be balanced promotes economic instability; both booms and busts get bigger.

So, is the state of Montana doomed to do exactly the wrong thing when the economy begins to falter? Not necessarily.  To balance the budget, the Legislature needs to do two things: not borrow money to pay for General Fund expenditures and end the budget year with a reasonable balance in the bank.  We can spend more than we tax if we start the year with more money in the bank than we need when the year is over. It’s a simple concept: tax revenues are volatile, but we can keep spending from being as volatile by saving the extra taxes we collect in good times and spending them in bad times. Hold some reserves for a rainy day:  it’s something that every business and household routinely does. But if LR123 passes, the state of Montana will not be able to take the same reasonable, job saving precaution.

Republicans aren’t bothered by this thought because they know that spending can’t create jobs. Well, sort of.  Spending on the Keystone XL pipeline will apparently create a ton of jobs. It’s just government spending to build a new College of Technology that won’t. Go figure.