By Dave Vaudt, CPA
Hard times have made Iowans nervous about the future. The problem is simple—for years, our state has spent more than it has taken in on an ongoing basis. Our elected officials were able to do this by playing shell games with funds and accounts designed for other purposes. Now, with those funds drying up, coupled with an economic downturn and last year’s flood damage, Iowa faces a perfect fiscal storm—the likes of which we have not seen in a long time.
The solution to this problem is obvious—bring expenditures back in line with revenues. Since our elected officials have the ability to adjust both sides of the equation—spending and revenues—they must cut spending, raise taxes, or a combination thereof. In my official capacity as State Auditor, it is my responsibility to remind elected officials of a very key fiscal objective—bringing revenue and spending into balance. It is the responsibility of our elected officials to make the painful decisions to accomplish this fiscal objective.
As State Auditor, I have warned about the consequences of raising taxes to bridge a revenue gap— driving businesses, jobs and people away from this great state. As a rule, raising taxes in a recession is a terrible idea. Tax hikes lead to belt-tightening by our citizens and businesses, which in turn negatively impacts businesses through reduced sales. In an effort to cut costs, these businesses will be forced to shed jobs. The higher unemployment that results will put an increased strain on state resources as we provide unemployment benefits and insurance to displaced workers—possibly offsetting the revenue gains made by raising taxes in the first place. Given this undesirable economic domino-effect, raising taxes during a recession is simply not a rational decision.
That leaves the spending side of the equation to address. During a press briefing covering my analysis of the Governor’s budget proposal I was asked, “What would you cut if you were Governor?” My answer was simple. If I were Governor, I would not have to cut anything because I would not have spent excessively in the first place. It is a fact that if state spending had grown at the rate of inflation during the last two years—rather than at double the inflation rate—we would not have a budget problem today. Plus, we would have over $800 million more in funds and accounts available to deal with flood damage and possible additional effects of the economic downturn. The lesson here is that fiscal responsibility from day-one results in greater flexibility to deal with future challenges without having to cut services at a time when Iowans need them most.
Instead, the fiscal practices of the past two years will mean tough choices that will hurt Iowans—painful tax hikes, painful service cuts, and painful delays in getting aid to flood-ravaged parts of Iowa. I do not envy our elected officials who will have to make these decisions. However, I hope this serves as an important lesson about the benefits of governing with a longer-term view in a fiscally responsible manner.
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