Sunday, March 6, 2016

Losing Touch With Reality

In recent meetings with the editorial boards at the Helena Independent Record and the Billings Gazette*, gubernatorial wannabe Greg Gianforte has laid out a plan for tax cuts and infrastructure spending that frankly loses touch with reality. A former businessman, Gianforte is a Republican outsider with no experience in governing, which may explain how he has come up with a proposal that would make a complete mess out of the state’s budget.

According to Gianforte, the state has a surplus of “almost half a billion dollars.” With that  money, he figures, we could eliminate the business equipment tax, which he claims is the “most regressive” tax on the books. We could also adopt a measure to cut income taxes that made it through the 2015 Legislature, only to be vetoed. And after both of those tax cuts, Gianforte figures, we would have enough left to spend $200 million on infrastructure projects.

Consider Gianforte’s claim that we have a “surplus” of half a billion dollars. He appears to be referring to the $455 million the state had in the bank at the start of the current biennium. But he doesn’t seem to realize that by the beginning of the next biennium, that cash on hand is expected to be reduced to $357 million. It’s only then that Gianforte, if elected, could begin to put his tax and spending proposals in place, so he would be doing that with about $98 million less to work with than he thinks.

But it gets worse. Right now, the amount of ongoing revenue the state takes in just about equals the amount that it spends. The budget is currently balanced; there is no surplus or deficit. The money that’s in the bank is not a current surplus; it’s a reserve that has been set aside out of past surpluses. So if Gianforte really did cut taxes and increase spending, the state would run a deficit, and the only way we could pay for it would be by eating up our reserves.

And with Gianforte’s plan, those reserves would disappear very quickly. Assuming that the state would make up for the loss to local governments, eliminating the business equipment tax would cost at least $160 million over the next biennium. Depending on the details, cutting the income tax could easily cost another $100 million.** And then there’s the $200 million Gianforte says he will spend on infrastructure. All that adds up to $460 million, which means that we would blow through our $357 million cash reserve well before the biennium was over, and would still be running a serious deficit with no way to pay for it. Needless to say, running a deficit and cannibalizing our reserves would obliterate the track record for sound fiscal management put up by Steve Bullock. And the state’s credit rating, which right now is excellent, would go in the tank. Nobody would want to lend money to a state that had lost all sense of fiscal discipline.

Quite aside from being fiscally irresponsible, Gianforte’s proposal to eliminate the business equipment tax is misinformed.  Several past legislatures have already substantially reduced the tax, and in 2013, eliminated it entirely for 60 percent of Montana’s small businesses. The bulk of the tax is now paid by large businesses. How Gianforte concludes that that makes it the most regressive tax around is a mystery to me.

Another big problem with eliminating the business equipment tax is that it puts a major dent in the budgets of local governments, which means that they either have to cut services or shift the tax onto other taxpayers, mainly homeowners. To prevent that from happening, the legislature would have to make up for the loss of local revenue with state funds. That's what it's done in the past, and it works, but it simply means that the dent moves over to the state budget.

Gianforte’s taxing and spending plans don’t pencil out, but you shouldn’t let that worry you too much. Because even though Gianforte doesn’t seem to know it, the state constitution requires the budget to be balanced. So his plan is simply unworkable. There’s some comfort in that, although it’s alarming to think that there is a candidate out there who doesn’t seem to know or care that he is pitching a plan that can never get off the ground.

* You can see video of these meetings here, for the Independent Record and here for the Gazette.

** Gianforte says he would have signed the income tax cut bill that Steve Bullock vetoed. Since the governor in fact vetoed three such bills, it’s anyone’s guess what Gianforte is actually talking about. The three bills (SB 171, SB 200 and HB 166) would have cost, in lost revenue, $22, $112 and $85 million respectively. The Republicans were only serious about the first one, SB 171. The other two were obvious budget busters that were sent to the governor so that he would have to veto them, which would give Republicans a chance to go after Bullock in his re-election campaign. And sure ‘nuff, that’s what Gianforte’s doing.