Governor Napolitano Has Presented a Phony Budget

Danger: Budget on board

Napolitano's plans for spending in 2007 are based on assumptions (and we know how that works)

Jan. 22, 2006 12:00 AM

In a very material respect, Gov. Janet Napolitano has presented a phony budget. It depends on an assumption that just isn't going to happen.Napolitano's budget assumes that there will be about a billion dollars in excess funds from this year to pay for spending next year. Current law, however, provides that at least $440 million of this year's surplus go into the "rainy day fund," and arguably all of it.

At the end of last year's legislative session, Napolitano did a curious thing. She vetoed legislation that earmarked some of last year's surplus for the rainy day fund, about $314 million. But she failed to veto a similar provision for this year's surplus.So, current law says that any surplus for this year automatically goes into the rainy day fund. Arguably that could mean the entire $1 billion. There is, however, a separate law that limits the amount of deposit into the rainy day fund to a percentage of state revenue. Legislative budget staffers are assuming that law caps the deposit at $440 million.

Usually in these budget fights, Napolitano has the upper hand. Nothing gets done without her signature.But in this case, the Legislature has the upper hand. If nothing is done, the money goes automatically into the rainy day fund and isn't available for spending next year. And the money begins to be deposited there as early as next month. So, Napolitano's budget rests on the assumption that the Republican Legislature will repeal the automatic deposit to the rainy day fund and make it available for Napolitano to spend. That's not going to happen. Perhaps it's useful for Napolitano to put out a budget that shows what, in an ideal world, she would do. But, realistically, she's going to have a lot less money to spend, probably at least the difference between what current law provides for a rainy day deposit and the $180 million she proposes for next year. Knowing how she would propose to spend within that more realistic constraint would be more valuable than the pretend budget she has presented.

During her State of the State address, Napolitano said that she would never again let the state get into the position of being unprepared for a fiscal downturn. Her budget, however, would increase rather than diminish the state's vulnerability to such a downturn. Next year, Napolitano assumes that the state will collect about $9.2 billion in revenue. Napolitano purposes spending about $10.1 billion, with the difference being made up through this year's surplus.Even subtracting a proposed deposit to the rainy day fund and repaying various state funds that were swept during the lean years, Napolitano purposes to spend about $400 million more next year than will be generated in taxes. The states that did best in the last downturn were those where spending increased the least during the go-go days of the 1990s. Napolitano is trying to lead Arizona in precisely the opposite direction.

With state revenues booming, Napolitano has been revealed as quite a spender, contrary to the penny-pinching image she sought to project with last year's budget.According to the legislative budget staff, maintaining state programs and obligations will cost $8.9 billion next year. Napolitano proposes spending about $700 million more than that, excluding a rainy day deposit and repayment of the swept funds. Overall, Napolitano is recommending an increase in state spending, again excluding savings and fund repayments, of nearly 17 percent. But the revelation is perhaps clearest in her so-called "targeted tax relief" proposal. "Targeted" means government gives you a break for doing things approved by the government. In Napolitano's case, that means offering health insurance, buying certain items at certain times, driving a fuel-efficient car, and investing in university-related research.There are two problems with such "targeted" tax cuts. They are economically inefficient, since government doesn't make spending or investing decisions as optimally as people exercising their own judgments with their own money. And they erode the tax base, making a truly economically productive tax code, which would feature low rates on broad bases, more difficult.

Real tax relief is when government lets you keep more of what you earn to spend on whatever you think best and most productive or enjoyable. What Napolitano is proposing is more accurately thought of as spending through the tax code. Direct subsidies would be a more honest and less economically disruptive approach.

Reach Robb at robert.robb@arizonarepublic.com or (602) 444-8472. His column appears Sundays, Wednesdays and Fridays.