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OPINION | JOHN C. PICKETT: Driving out good

Bad economics won’t help state by JOHN C. PICKETT SPECIAL TO THE DEMOCRAT-GAZETTE | July 23, 2021 at 3:05 a.m.

The Legislature continues to be unhappy with the governor's office.

It is and was disappointed with Hutchinson's response to the spread of covid last year. It passed legislation prohibiting the governor from requiring face masks, six-feet distancing, school closings and other public health measures to contain the spread of the virus.

The state's current public-health policies reflect the collective wisdom, though faulty, of the General Assembly, and the defective legislation explains the current surge in the virus among the unvaccinated.

The most recent effort by the Legislature to thwart the governor's office focuses on the state's budget. The Bureau of Legislative Research issued a request for proposals to select a consultant to estimate the fiscal impact of proposed legislation and to forecast how much the state will collect in revenue.

The Department of Finance and Administration already performs both of these tasks. Historically, the department's record for both estimating the fiscal impact of legislation and forecasting revenue have been accurate.

Members of the Legislature cite the workload imposed on the department during a legislative session and conclude, without evidence, that the department's staff is overworked and imply the staff does not perform at acceptable levels. Sen. Jonathan Dismang asserts that having another opinion would give lawmakers greater confidence in making decisions.

Maybe so, maybe not. So or not depends on the member's skill in evaluating two different analyses. If the outcome of the last session is any guide, there is little hope that the choice will promote the public interest.

The Legislature's unhappiness focuses on the analysis prepared by the Department of Finance and Administration. Members want the analysis to show that larger immediate reductions in tax revenue result in much larger increases in future year's tax revenue. Collectively, the members follow prescriptions offered by the old, worn-out supply-side economists.

Remember that the only economic policy offered by Republicans is to cut taxes. Significant inefficiencies in higher education, the Department of Higher Ed and some other government departments continue unaddressed. They assert that tax cuts lead to wondrous things. The only problem is that aggressive tax cuts lead to a shrinkage in government services, more debt or both. The best evidence is that the large tax cuts in Kansas, Oklahoma and Louisiana led to significant reductions in the states' education, highway and other budgets. Further evidence on the national level includes George W. Bush's and Donald Trump's large tax cuts followed by the ballooning national debt and no surge in gross domestic product.

The Department of Finance and Administration follows the methodology called "static" analysis. For example, if the sales tax is reduced on food, then knowing how much is spent on food, it is simple arithmetic to calculate how much tax revenue will decline as a result of reducing the sales tax from 4.5 percent to 1.5 percent or some other amount. Knowing the base on which the tax is calculated, it is not difficult to estimate the reduction in tax revenue when the tax rate is reduced.

Static estimates of next year's sales, income and other revenue sources follow the same, though slightly more complicated, arithmetic calculations. However the revenue calculations are made, Department of Finance and Administration has a history of preparing accurate forecasts.

In contrast to the department's tried and true methods, the Legislature wants "dynamic" forecasts. Read "dynamic" as "souped-up."

The dynamic part is that instead of a one-time in-and-out calculation, this method includes the second-, third-, and fourth-round effects (the soup part). These assertions state that if income taxes are reduced, then in the next year the tax savings will flow into additional retail sales and investment stimulating a further round of increases in employment and wages, retail sales, home purchases, and eventually increase sales- and income-tax collections. Dynamic forecasts attempt to estimate these future effects and roll them all into an increase in tax revenue which exceeds the initial tax reductions so that the proponents can assert "the tax reductions pay for themselves."

Balderdash! After all these years of tax cuts, there are no empirical academic studies that prove this claim. The claim is a hoax, like so many others floating around Arkansas' body politic today.

The state's annual budgets requires that they be balanced. If the revenue forecasts resulting from dynamic models include revenue which will not be collected until far into the future, if ever, then the budgeting process has big problems.

The budgeting problem goes like this. If large tax cuts are included and the budget reflects both expenditures and revenue which will not materialize, then next year the expenditures will exceed revenue, and expenditures will have to be cut.

There is a relatively simple and straightforward solution to the mismatch between static and dynamic forecasts. The staff of the Department of Finance and Administration already knows the solution. It will be a monumental challenge for the members of the Legislature to understand the solution and agree.


John C. Pickett is an emeritus professor of economics at UALR. He can be contacted at pickett@conwaycorp.net.

Print Headline: Driving out good

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