Hey guv: stop slashing!

By LANCE TAPLEY  |  December 31, 2008

Economist Charles Colgan, of the University of Southern Maine, told Mainebiz: “Even while the federal government is stepping on the accelerator, the states and local governments are stepping on the brake.”

But Maine’s constitution requires a balanced budget. Unlike the federal government, the state can’t indulge in deficit spending; it can’t borrow to cover current expenses. So do we have no alternative but to cut services, maybe pinning some hope on the local effects of Obama’s stimulus package?

Although state departments are giving the governor wish lists of how federal stimulus money could be spent (much will be channeled through the states), at his December 16 news conference Baldacci said Obama’s aid “won’t be able to help in the initial budget” for the next biennium. And even if Maine gets federal infrastructure money this year, it may not help with education and human services.

Yet there are alternatives to state-budget cuts. They are available right now or in the immediate future. Here are four possible state actions developed with the help of a couple of Maine economists and backed up by the advice of national experts. These actions will help us get out of recession.

Alternative 1: an income-tax “recession surcharge” on the wealthy
Clearly, if state taxes were raised, fewer services would need to be cut. But increasing taxes gives people less money to spend, and that would tend to push the state further into recession. Some economists, however, say we can get around this dilemma by increasing taxes only on the people who have extra cash.

“In the short run, take from the people who can afford it to protect the people who obviously need help,” says Messier.

But he’s not just arguing on the grounds of fairness. Taxing the wealthy actually fights the recession. And in the long run, by stimulating the economy, even the wealthy benefit.
Early this decade, during the last recession, Joseph Stiglitz, the Nobel Prize-winning Columbia professor, and Peter Orszag, chosen by Obama to be his budget director, wrote that “Tax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits in the short run.”

This is because the rich save as well as spend, while the poor and middle class pretty much just spend their money, quickly putting other people to work through the ripple effect.

Stiglitz, Orszag, and other economists also say that in a recession “transfer payments” like food stamps and unemployment benefits should not be cut because they are instantly spent — locally. Mark Zandi, chief economist at Moody’s Economy.com, has calculated the economic ripple effects of various stimulus proposals. A dollar spent on food stamps generates $1.73; a dollar of extended unemployment benefits, $1.64. By contrast, a corporate tax cut would generate 30 cents per dollar, and making permanent George W. Bush’s income-tax cuts for the rich, 29 cents.
These days, raising taxes on the rich is hardly a radical idea. Obama’s campaign proposal to increase taxes on families making over $250,000 a year — reversing the Bush tax cuts — didn’t prevent him from being elected, despite being called a socialist by Republicans.

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