MARCUS: Radical government budgeting proposed

Nerdon Naughton of Noblesville will tell you he is a conservative, but I know him to be a radical. We had this electronic interchange recently:

NN: Why do we have all this fuss year after year over government budgeting? Deficits at the state or local level are totally unnecessary, except in absolutely catastrophic circumstances. Indiana is issuing reports each month on how revenue is falling short of forecasts. Who cares? Forecasts are inherently unreliable; they lead only to false expectations. Government expenditures should be based on revenue realized, not revenue anticipated.

MM: Your approach to government finance seems remarkably simple-minded. Governments make budgets based on programs to benefit citizens. Your system would keep us tied to last year’s revenue, unable to meet challenges and responsibilities as they arise.

NN: Just imagine a local government receives $1 million from its own sources in 2008. Then that million (plus whatever state and federal funds it receives) would be all it could spend in 2009.

MM: What’s “its own sources”?

NN: Taxes, fees and fines should be under the control of each local government. Today, however, property tax collections are based on state-controlled assessments, state-specified deductions and exemptions, state-determined credits, and state approval of proposed budgets.

Some local governments receive money from other taxes created and collected by the state (“optional” income taxes and earmarked taxes on hotel rooms and rental cars or restaurants). These may be used locally as dictated by the General Assembly. At the same time, a locality may get fees from certain privileges it allows (parking), certain inspections (construction or elevators), and fines (speeding or littering).

MM: Are you calling these “local” sources of funds when they are subject to overwhelming control by the Legislature?

NN: That’s how they are classified. But that’s not the point. The total of these receipts is known by the end of the year (fiscal or calendar, as you prefer). We could put governments (local and state) on a cash basis, prohibited from spending more than they take in during the prior fiscal period.

MM: We already have balanced budgets where revenue equals expenditures.

NN: Those are fakes where expected income equals planned outlays.

MM: What is a city to do when there is an unusually heavy snowfall? You can’t just take that money away from another activity. Should the mayor announce that, because of the heavy snowfall, all employees will have a reduction in salary for the month?

NN: That’s why every government, like every household, needs contingency funds saved from prior years. Otherwise, like households, they will have to go into short-term debt. But that’s just quibbling. The essential issue is to get out of the cycle where governments plan to spend money they don’t know they will receive.

Most important, it will get governments to see that income and sales taxes are not a solid foundation for funding basic services. Those taxes vary with economic conditions. Taxes or fees that are steady producers of revenue are needed to support basic services.

MM: That’s what we thought about the property tax. It was stable, but recent experience has shaken that belief. Your scheme would have taxes or access fees on necessities (food, water, parking, sanitary sewers, TV, Internet activities) if we are to have stable revenue sources.

NN: You’ve got it. Necessary services should be supported by necessary activities. The public must come to understand that government’s share of income must rise in tough times to meet ongoing responsibilities. That means a reduction in consumption spending.

MM: Nerdon, people might accept a change in the budgeting calendar, but advocating a reduction in private spending during tough times, that will land you in an asylum. I could recommend one.•

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Marcus taught economics for more than 30 years at Indiana University and is the former director of IU’s Business Research Center. His column appears weekly. He can be reached at mmarcus@ibj.com.