The art and science of revenue forecasting: Teacher pay and tax cuts
MARCH 11, 2001
I am among those who favor both tax cuts and teacher pay increases. Yes, I know about mixing state and national issues. Dubya Bush has cornered the tax cut cause within the Beltway. And in Jackson, Ronnie Musgrove is carrying the teacher pay flag.
There is, however, a common thread in both of these programs. Each hangs on revenue projections. That's correct, each is built around assumptions about the flow of tax dollars. And prediction of tax receipts requires making assumptions about the relative economic health of the state and nation. Talk about a game of chance.
Our hindsight tells us that Mississippi's economy as well as our national economy has cooled. And may get a bit cooler before rebounding. Slower overall job growth translates to less tax revenue than expected. No work, no taxes to pay.
Last spring the Mississippi Legislature approved a long needed multi-year teacher pay increase program strongly advocated by the governor. The program was funded for the initial year and future funding was conditioned by the growth of state tax funds. The idea was "if the money's available, the future increases will be funded."
Guess what? State revenue has not materialized as "projected." Teacher expectations have been raised, political positions taken, most state agencies have taken budget cuts within this year and will enjoy deeper cuts next year. A classic case of forward funding based on projections.
And on the national scene, the tax cut proposals presented by President Bush's team are crafted around ten year projections. Do you think Washington budget projectors and planners are more accurate than their Mississippi counterparts? Maybe so, probably not. The huge numbers seem to allow more wiggle room.
But it's not the big numbers that rattle my cage. It's the TEN year projection frame and those items included or conveniently omitted. Year by year estimates are not easy and three year projections are very difficult. And questions of what to put in and what to leave out are easy on the front end of a projecting process.
Ten year economic projections, while rooted in current information and knowledge, are predictions, not facts. Sort of like video taped historical fiction played on fast forward. Or maybe an artist's rendition of the future played on slow rewind. Ambiguous. Fuzzy.
How fuzzy? The budget proposals assume, that's right assume, Congress will hold growth in discretionary spending down to 4 percent next year. That's one-third less Congressional pork than the average of the last three years. Anyone want to bet Congressional restraint will hold discretionary growth to four percent? As Tip O'Neil knew, and as Emeril Lagasse says "pork fat rules."
Other assumptions include the concept of Congressional agreement about overall spending levels. Such agreements sound noble and good but have a very spotted history. Both parties have been guilty of agreeing to and then abandoning "spending caps."
Trying to juggle debt management, trust fund solvency, public spending and tax reduction over a ten year period is a mind boggling exercise in social and economic engineering. Common sense would suggest a year by year strategy to:
(1) pay down the debt
(2) assure social security solvency
(3) cut taxes
(4) control spending based on what's left.
And yet we do know government expenditures tend to rise to meet tax income. How about incremental cuts? Year by year reductions, adjusted annually depending on the condition of the economy and upon Congressional spending restraint seem to make sense.
But back in Mississippi, taxpayers are about to pick up a check for teacher pay increases. Paying this tab will require continuing spending discipline of all state agencies. Our cooling economy will result in lower tax revenue receipts. Are there lessons to be learned from the teacher pay deal that might apply to the national tax cut proposal?
Bill Scaggs is president emeritus at Meridian Community College and a senior consulting editor for The Meridian Star. E-mail him at email@example.com.