Wednesday, February 07, 2007

Slow Larry 

Many years ago I was in a bowling league. (I still substitute bowl for a couple teams in that league on occasion, but my game has gone the way of Donny Kerabatsos.) In it were two guys named Larry, one of whom threw the fastest ball I had ever seen, and the other the slowest. Fast Larry was a pleasant guy, not at all jumpy, and you'd never guess that he would throw a ball that seemed practically violent. Slow Larry, on the other hand, was slow in everything, which, for a computer programmer, seemed pretty odd. His response on his job was as 'fast' as his hook.

Which Larry is serving as my state representative? Neither, but mine is taking a resemblance to one. My SCBA brother Gary Gross sent a letter to Larry Haws about the need for tax cuts, and after almost three weeks he got a reply. Except that I don't think he answered the question. Gary was kind enough to forward the letter to me, so I'm quoting parts not in Gary's post.

Note first that Rep. Haws is challenging any idea that there's a surplus by using what I now call "the inflation dodge".
First, I should note that the predicted "surplus" can be somewhat misleading since inflation is not included on the expenditure side of the forecast, but inflation is assumed in the revenue side which, to my mind, ends up inevitably with a more optimistic and risky forecast than if both aspects were treated equally. It is very challenging to predict income growth, whether that is from higher taxable pay, more workers, increased sales subject to sales tax, more homes sold, more cars sold, or whatever. Generally, economics is a risky thing to forecast several years in advance, but this makes it more so. We should also have a little more complete prediction at the end of February when the official budget forecast is released yet it still will tend to have that bias towards predicting more revenue than might be the case.
That appears to be a concession that the bill -- which has passed the Senate on a party line vote -- may not pass in time for the February forecast. Whether this means they do not have the votes to override Pawlenty's threatened veto isn't clear.

But let's be clear about what the bill does to help out this Larry: The forecast currently figures what happens to the budget if there are no legislative changes, assuming that by default spending will occur at present levels. Indeed, the Senate amended its bill to include language that says including inflation does not trigger automatic spending increases. Therefore, in order for the projected inflation to occur in expenditures the government must vote to increase spending. The bill charges the Finance department to guess what that inflation is, adding an additional level of error to the forecast. And we do not know what type of inflation adjustment should be made for the various things government buys, from law enforcement goods to transportation goods, and don't forget the inflation that occurs from negotiating with public employee unions. Not one CPI fits all.

Moreover, the size of the forecast errors are quite small. The budget for the state of Minnesota is about $31 billion. The forecast error for revenues in 2006-07 was $124 million, or for you Pittsburgh Steeler fans, $0.124 billion, or 0.4%. The larger error was in 2005, when the forecast of revenues was off 2.2%. There is a tendency to make errors that understate the level of revenues anyway, and if you forecast spending higher you have to expect that there will be a tendency to get even more conservative with forecasted revenues. (Nobody wants to go before a Senate committee and explain how you overestimated revenues.)

Rep. Haws continues:
Second, I'm also concerned about rapidly rising local property taxes which have been caused in large measure by the state's cuts in aids to local governments, and in part by added state mandates on local government both of which ended up shifting a significant portion of the state's financial burdens onto local property taxpayers. That particularly concerns me because property taxes tend to be the least related to a property owner's ability to pay especially for many seniors and others whose property has grown in value but their incomes have not.

One of my top priorities for tax relief this session is, therefore, property tax relief. I'd also prefer any tax relief to be long-term and sustainable, not just a one-time measure that disappears and leaves taxpayers back where they were the year before. If the state's surplus turns out to be real and long-term, I'd prefer to see that get used for permanent property
tax relief.
But didn't he just say that forecasting was hazardous? So how will we prove to him that any surplus is "real and long-term"?

He also indicates by this note that local government activity is as fixed as state level. His stated concern for seniors in houses that are appreciating faster than their incomes (and so too then their tax bills) is touching. He could fix that with an adjustment on property taxes for seniors, but instead wants to use it to argue for increasing the share of local spending that the state would take over. That money will come with strings attached, something Mr. Haws used to worry about, but no longer.

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