Drinking the Tax-Cut Kool-Aid
For two centuries, the federal government borrowed money in lean times and to fight wars, then paid down debt when the economy grew. All that changed when President Ronald Reagan bought into the unproven theory that the best way to grow the economy and increase tax revenues is to slash tax rates.
Turns out that the theory is dead wrong, as shown by the dramatic run-up in debt during the Reagan and George W. Bush years. The result: slower growth, reduced investment in research and infrastructure, and no sacrifice by taxpayers to pay for the Iraq and Afghanistan wars.
In short, the investments we need to create jobs and build a strong economy are being shortchanged as leaders from both parties continue to drink the tax-cut Kool-Aid.
At the federal level, this folly can be masked for a while because Washington can run annual deficits. States can’t. Yet states are increasingly balancing their budgets by passing their bills to the next generation — none more so than New Jersey.
It’s important to understand how New Jersey went from one of only five states earning the top AAA credit rating to one of the bottom five states in just two decades. New Jersey was conservatively managed. The rule was simple: If you demanded a public service, you paid for it. Want your highways plowed? You pay. Need to replace a bridge? Borrow to build it and let future users pay their share.
But since the mid-1990s, our governors and legislators have violated this rule. Neither party has told the whole truth or stood up to the facts since.
It was Gov. Christie Whitman’s administration that put the state on the road to fiscal ruin. All it took were three radical policy changes:
• Slash income tax rates by 30 percent over three years without the spending cuts her 1993 campaign promised to offset the lost revenues.
• Empty the fund established by Gov. James Florio to pay for recently approved retiree health benefits.
• Float a $2.7 billion bond issue to pay the state’s share of future employee pensions and fully invest it in Wall Street just three years before the market plunged.
With the crash, New Jersey taxpayers were on the hook for repaying the bonds and covering the investment losses. Altogether, we will pay back $10 billion to cover the payments that couldn’t be made because of lost income tax revenues.
The unfunded retiree health benefits liability has now grown to $55 billion. And the pension mess is almost as bad, with the funds short about $26 billion. Governors and legislatures of both parties deserve the blame for not making the annual contributions that would have avoided the problem.
So, with New Jersey’s credit rating sinking, its debt rising and its budget balanced with gimmicks, this is the time Gov. Chris Christie chooses to declare that the state’s fiscal house is in order and propose a $1 billion tax cut.
Not to be outdone, the state’s Democratic legislators have proposed equally large tax cuts, both of which starve the state of much-needed revenues. (While the Assembly’s cut is financed in part by an income tax increase on the state’s wealthiest residents, it still ends with a net loss in revenue.)
While our leaders are busy trying to out-tax-cut each other, there is reason to worry about the consequences. Is this really the time to simply declare victory over decades of fiscal mismanagement instead of actually fixing the problems?
New Jersey’s budget is far from fixed. The state has slashed support to vital public services, resulting in a simple fact all of us can relate to, whether we’re talking about education or public transit: We’re paying more but getting less.
The myth here is that our economy will improve only if we cut taxes. This ignores the reality that public goods such as high-quality education and a skilled, well-educated workforce are far more important than tax rates in attracting high-value jobs.
The lessons from the past are painfully clear. Cutting taxes and passing the bill to future generations doesn’t work. New Jersey needs to stop drinking the tax-cut Kool-Aid.
Editor's Note: Gordon MacInnes is President of New Jersey Policy Perspective. This OP-ED piece originally ran in the NJ Star Ledger on April 15, 2012