Planning Decisions, Inc.

THE BOTTOM LINE FROM CHUCK LAWTON

Investment and the State Budget

Published Sunday April 20, 2008

Is the glass half empty or half full? Most of the talk about taxes and the state budget revolves around the concept of “burden.” What percentage of income or earnings does the state “take” and how does that affect people’s behavior? Do they not invest in Maine, not come to Maine, or leave Maine because of this “burden?” State taxes and spending in this context are seen as entirely negative.

It is interesting, in this regard, to examine the trends for the state general fund budget and total Maine earnings as reported by the Bureau of Economic Analysis. Between fiscal year 2003 and fiscal year 2008, the Maine general fund budget increased from approximately $2.5 billion to approximately $3.1 billion—an increase of 24 percent. Over the calendar years 2002 through 2007, the total earnings of all Maine workers—including both those “formally” employed and those self-employed—increased from $25.6 billion to $31.5 billion, an increase of 23 percent. Over the entire seven-year period, state general fund spending remained a virtually constant 10 percent of total in-state earnings, increasing only one tenth of one percent in fiscal year 2008.

Had earnings growth matched revenue growth, i.e., grown by one percentage point more than it did, the general fund would have had—given the existing set of taxes and tax rates—an additional $23 million to work with in fiscal 2008.

This perspective rather than that of burden, I submit, is how we need to start thinking about large portions of our general fund budget—not as consumption to meet current needs but as investment to reduce needs in the future. Not as money that is gone as soon as it leaves the door, but as money that produces a return in the future.

Easy to say, but how do you do it? The answer lies in thinking not merely of outputs—how many people served, students educated, miles of road repaired—but in terms of outcomes—how many skilled workers created, how much lower energy costs, how many jobs created.

To have generated an additional $100 million in state general fund revenue in fiscal year 2008—given our existing tax structure and the average earnings per job of $37,000—we would have needed approximately 25,000 more jobs. Presented in this fashion, that seems like a lot. How could we have had 25,000 more jobs last year?

In one year, that is indeed a lot, an enormous number. Yet had the annual rate of job growth since 2002 averaged merely 1.8 percent per year instead of the 1.0 percent we did achieve, we would have had those 25,000 “extra” jobs in 2007. And the “extra” $100 million in general fund revenue they would have generated to help “solve” our budget crisis.

My point here is that we need to approach public spending not as a moral imperative—something we simply “have” to do or something we simply “have” to cut—but rather as what it is—the means to an end, a way to get where we want to go.

The question then becomes attempting to decide where we want to go, and then evaluating our various program proposals in terms of how well they get us there.

This is not to say that everyone will “see the light” and come to some agreement about what we need to do. No there will always be disagreements. Rather it is to say that we would be better served to focus our debate on the program outcomes we hope to achieve and their odds of success rather than their “rightness” or “wrongness.”

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