Buy Now, Pay Later

The problem in putting a price tag on government is that costs are deferred--buried in borrowed money and out of voters' sight.
September 2004
John E. Petersen
By John E. Petersen  |  Columnist
John E. Petersen was GOVERNING's Public Finance columnist. He was a Professor of Public Policy and Finance at the George Mason School of Public Policy.

Governments have a price that they ask their citizens to pay. In consumers' budgets, David Osborne and Peter Hutchinson suggest in their new book, "The Price of Government," the prices of bologna and toothpaste square off against property taxes and sewer charges. This pricing process is a natural phenomenon, and in a fast-changing society, the authors note, it has led to a permanent fiscal crisis. When federal revenues exceed the historical average of 18.5 percent of GDP or states and localities go beyond their usual limits (a maximum of about 13 percent), alarms go off and tax revolts start.

The authors describe ways to answer the alarms--by bottom-up budgeting and slicing and dicing programs to get more out of the public's money. This seems reasonable enough if, in fact, government has a "price." But the costs, much less who pays them, can be hard to figure. The property tax has shifted into a residential tax paid by individuals. The rise in sales tax rates has been offset by reductions in their scope and coverage. And although everyone gets in a tizzy over gasoline prices, taxes levied are an increasingly smaller share of the higher price. So, what we are really talking about are the taxes that consumers perceive themselves as paying, as opposed to taxes that are passed along in some form of higher prices, lower wages or lessened profits.

Perceptions are certainly subject to swings in sentiment. In periods of low inflation and prosperity, there is less carping about tax burdens, witness the relatively serene 1960s and the glorious 1990s, when tax collections were rising on the back of sustained economic growth. Today, despite the recent waves of large federal tax reductions, surveys show a lot of Americans are convinced that they are paying more taxes--or at least more than they should. In fact, the price of government plummeted in 2002 and 2003 as federal tax cuts took hold and state revenues declined sharply. While property tax receipts grew in many areas of the country as housing prices shot up, the federal tax cuts and the softness in state income tax receipts meant that all taxes as a percentage of national income in 2003 sank to their lowest point in nearly 50 years.

But the biggest problem in calculating a price of government has to do with not having to pay it--at least when the costs are incurred. The costs of government can be deferred--buried in borrowed money and usually out of the sight of voters. Social programs that cost the most money are not treated in an actuarial fashion. We know that the spending burdens placed on Medicaid and Medicare, for instance, are demographic time bombs. Ever-new treatments and cures create more ways to spend money as life is extended and enriched. The sober analysis done by the Congressional Budget Office documents the tidal wave of future costs, but politicians steer clear of the issue, meaning nobody speaks for the future when the bills will come due. For those of us who look forward to being a burden on our children, now's the chance.

While the federal government has a long history of borrowing for operating costs, states and localities supposedly can't do the same. But in effect they do: Borrowing may take the form of skipped pension contributions, deferred maintenance, forgone capital outlays and a wide variety of other buck-passing strategies.

Several states are now swallowing a strong dose of deficit spending. California's newly adopted budget, already fueled in part by a large one-time borrowing, contemplates more deficit spending. The interesting move this time is that the state is "borrowing" about $2 billion in aid payments that are due its cities and counties with the promise to repay them with interest. The localities have agreed to this on the condition that the state allows them, in turn, to borrow against the future state aid payments. It will be interesting to see how this back-door borrowing by the state through the medium of its local governments will be treated by the rating agencies.

On the other coast, New Jersey filled its $1.5 billion budget hole (in large part created in order to provide property tax relief) by issuing debt. Opposition legislators took the state to court, claiming the state's budget requires that current operating expenditures be paid for by revenues and that bond proceeds are not revenues. The New Jersey court agreed but held that the state could borrow for current purposes this once--but not again. The rating agencies, citing the rapid growth in debt, lowered the state's ratings.

Pumping borrowings into one year's operating budget represents both a reduction in savings and a burden on the future. While borrowing to soften the economic cycle has its uses, decline into deeper structural deficits hastens a fiscal train wreck that will spare none of the levels of government.