| July 5, 2012

FY 2013 budget: ‘There’s no cuts!’

At an OCPA speech in Tulsa last year and in other public forums, Indiana Gov. Mitch Daniels has said: “Never take a dollar from a free citizen through the coercion of taxation without a very legitimate purpose. We have a solemn duty to spend that dollar as carefully as possible, because when we took it we diminished that person’s freedom.”

With the new fiscal year now under way—a fiscal year in which our state’s political leaders are spending more than $500 per second—OCPA periodically will take the opportunity to examine the FY-13 budget deal that was reached at the end of this year’s legislative session. Is there “a very legitimate purpose” behind all this government spending? Is each dollar being spent “as carefully as possible”?

Even as President Barack Obama is the biggest government spender in world history, Oklahoma’s current political leaders are the biggest government spenders in state history. Total state spending continues to increase every year (analysts at both liberal and conservative think tanks in Oklahoma agree on this point). Much of the spending in this FY-13 budget is federal money, which many of our state’s political leaders seem to think of as “free” money. It’s not. As Manhattan Institute fellow Heather Mac Donald pointed out last week (“Federal Transfers Are Not ‘Free’ Money”):

The federal government’s biggest con game is promoting the fiction that federal dollars doled out to states and localities are “free” money—whether the Medicaid funds at stake in the Obamacare decision, food-stamp reimbursements, job-training money, or grants to local colleges for minority education in the sciences. …

Federal transfers are not even a zero-sum proposition; they are a negative-sum proposition, leaking value at every step of the way, thanks to the costs of collecting federal tax dollars, then trickling them back out to the states’ own costly bureaucracies via federal paper-pushers who write and oversee grant programs.

And yet this massive Ponzi scheme allows the federal government to wield enormous power in the illusion that it is conferring on states and cities free money from some mysterious external source outside of their own businesses and residents. (The only arguable source of such money from beyond local sources would be money borrowed from China, say, which then gets magnanimously doled out to the states by wise federal bureaucrats, but even there, we—not “Washington”—pay the interest on the borrowed funds.)

Some Oklahoma policymakers object that they shouldn’t take the rap for their spending spree because this federal money is the federal government’s problem. But of course that doesn’t wash. No one is forcing state policymakers to chase all this federal money. Moreover, chasing the federal money spurs higher state spending. Fortunately, these undeniable truths are now front and center in Oklahoma, thanks to the recent Supreme Court ruling on the president’s health care law.

The econometrics firm Arduin, Laffer & Moore has noted (“Don’t Chase Federal Funds”) that “federal funds are not ‘free’ and, in fact, contribute a great deal to the unsustainable growth of state government and a resulting decline in economic growth.” My colleague Jonathan Small has pointed out that in Oklahoma, “it is the federally induced welfare programs, such as Medicaid, that require ever-increasing state funding matches for the programs’ exploding costs.” That’s why OCPA has suggested many reforms to reverse this trend. Unfortunately, state policymakers have chosen instead to exacerbate the trend—even resorting to gimmicks and tax hikes to do so.

Even the liberal Tulsa World has recognized (albeit in another context) that sometimes federal money is quite simply “generosity we can’t afford.” Certainly conservatives know this. OCPA economists Scott Moody and Wendy Warcholik have shown (‘Federal Grants and Unintended Consequences’) that chasing federal dollars spurs higher state spending. Indeed, absent the recent run-up in federal grants to Oklahoma, our state’s political leaders nearly would have been able to eliminate the individual income tax.

Alas, spending was more important to them. As Mr. Small told The Wall Street Journal’s Stephen Moore, Oklahomans didn’t get a tax cut this year “because the Republicans decided they’d rather spend the money.” Indeed, one prominent lawmaker praised the FY-13 budget deal—a budget deal which increased appropriations by $331 million over the previous year (an appropriations increase of nearly 5 percent), spent all available certified revenue, took money from dedicated funds to use for other purposes, and left virtually nothing for personal income tax cuts. “You have a budget before you, members, that there’s no cuts!” he said. “I'm proud of that.”

As Barry Goldwater asked long ago: “Where is the politician who has not promised his constituents a fight to the death for lower taxes—and who has not proceeded to vote for the very spending programs that make tax cuts impossible?”

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