Elementary economics has proven that there is an optimal point where a certain tax rate brings in the greatest amount of tax revenue. For years, the government has been taxing its citizens beyond that optimal point, and now, with lower tax rates, both State and Federal governments are seeing an increase in the amount of tax revenue. The government should continue to decrease the tax rate until they reach that optimal point, which will be easy to find because once the tax rate falls below the optimal point, tax revenues will again decrease, just as if they were too high.

June 11, 2007
States Finding Fiscal Surprise: A Cash Surplus
http://www.nytimes.com/2007/06/11/us/11legislature.html?ei=5065&en=f454c960bddd2fde&ex=1182225600&partner=MYWAY&pagewanted=print

State lawmakers across the country, their coffers unexpectedly full of cash, have been handing out tax cuts, spending money on fixing roads, schools and public buildings, and socking something away for less fruitful years.

Budget surpluses have largely stemmed from higher than expected tax collections — corporate tax revenues alone were 11 percent higher than budget estimates — and booming local economies. There has also been some relief in Medicaid spending, which fell from an 11 percent annual growth rate to something closer to 7 percent in the past few years.

More than 40 states have found themselves with more money than they planned as they wound down their regular sessions. Governors in 23 of those states proposed tax cuts, and a majority of states with surpluses chose to shore up their roads, schools and rainy day funds. For example, lawmakers in Utah agreed to a $1 billion bond act to fix state roads and add lane miles, while in Idaho state spending on education outpaced that on Medicaid for the first time in 20 years.

The extra cash over the last two budget sessions (many states work on a two-year cycle) is at the highest level since 2000, state budget experts say. States, burned by several years of shortfalls, kept their estimates of total revenues on the conservative side and are now reaping plenty.

“Because states cut back so in the early part of the decade,” said Ray Scheppach, the executive director of the National Governors Association, “they put off maintenance, they put off building, things like that, so they are beginning to do some one-time spending.”

Like teenagers who went without allowance, legislators have been working off pent-up demand. Many states are largely using surpluses to tackle long-term and costly problems like the uninsured and crumbling infrastructures.

In large part, experts say, states are looking to give relief to taxpayers who have long been howling about property taxes, and to pay back areas that states have been robbing to balance previous budgets.

“When states return to a positive balance, they will not normally go back to tax cutting right away,” said Arturo Perez, a fiscal analyst with the National Conference of State Legislatures, which has tracked the spending of states and tabulated the list of those with surpluses. “But there has been across the country a growing interest in addressing the issue of property tax levels and burdens.”

Education — especially state universities — has also been long waiting, Mr. Perez said. “In times of difficulty, states tend to look for areas they can make adjustments to, and higher education represents the largest area of discretionary expenditures,” he said.

In the New York area, where legislators are still negotiating budgets, the song is much the same. Connecticut, for example, is looking at a $1 billion surplus for its 2007 fiscal year, and New York and New Jersey are mulling billion-dollar property tax breaks and large increases to the public education budget.

In about half a dozen state governments, the transfer of power to Democrats after last November’s elections made for a legislative season with more-liberal policymaking, sometimes hand in hand with spending initiatives. Laws extending certain rights to same-sex couples were particularly popular.

Most state legislatures have been finishing their business in the past few weeks and months, with about a dozen still in session. Laws vary by state, with some lawmakers working in the state capitals only part-time for a few months every two years, and others employed as full-time legislators who convene every January.

Over all in the 2007 fiscal year, which ends at the end of this month, state spending in the 50 states totaled $616 billion, an increase of about 8.6 percent over 2006, according to a report by the National Governors Association and National Association of State Budget Officers. The average annual growth rate over the past three decades has been 6.5 percent, the report said.
Only a handful of states have had to cut budgets, led by Michigan, which has suffered six straight years of job losses. Texas issued the largest property tax cut in its history — $14.2 billion for the biennium, representing roughly a one-third decrease for average home owners.
North Dakota gave homeowners $118.6 million worth of property tax relief, and Utah offered residents a $220 million tax cut package. In Arkansas, the Legislature reduced the state sales tax on groceries from 6 percent to 3 percent and rendered about 81,000 low-incomes families exempt from paying personal income taxes.

Nebraska gave residents $420 million in a host of tax cuts, the largest in that state’s history. “Property tax relief was high on the list of the demands from the citizens,” Mike Flood, speaker of the Legislature, said.

On the spending side, money was distributed across the board, but transportation and education saw some of the biggest boosts.

Arkansas, for instance, earmarked $80 million from its general fund to repair or expand roads and highways, a result, in some part, of that state’s estimated $313 million in extra net general revenues in fiscal year 2007.

In Wyoming, where the $6.9 billion biennium budget for 2007 and 2008 is 23 percent higher than the prior two-year budget, the Legislature sprung for $100 million to improve the state’s highways.

Utah lawmakers agreed to pay for the $1 billion bond act for roads with debt service paid out of the state’s general fund. “We have experienced significant growth here,” said John Massey, Utah’s legislative fiscal analyst. “So it is badly needed.”
Education has been another legislative priority. Idaho lawmakers increased spending for lower education 5.9 percent and for higher education by 8.4 percent, thanks in part to the $200 million surplus in this year’s budget.

“Higher education has a more flexible budget, and basically we have kind of used them as our checkbook,” said Maxine T. Bell, the chairwoman of the state’s appropriations committee. “And you can’t keep doing that. The infrastructure gets behind and they raise fees on the students. So this year we were able to give them a pretty good chunk of money, and it was just simply because the economy was in good shape.”

This week, the Louisiana Legislature, which is still in session, set aside a record amount for higher education, said John Carpenter, the director of that state’s joint legislative committee on the budget.

Many states have also taken on the expensive and seemingly intractable problem of covering uninsured residents, particularly children. According to a report from the National Governors Association, two-thirds of the nation’s governors have plans to expand health care in their 2008 fiscal years, largely through expansions of government-financed health insurance programs and employer mandates.

For example, Wisconsin is contemplating legislation to cover all of its children by 2010 by expanding programs to those living with family incomes up to 300 percent of the federal poverty level by January 2009 and discounted insurance to those with higher incomes.
In Oregon, where legislators are furiously working to wind down the session, lawmakers are deliberating a $60 million increase to a program insuring children via a 84.5 cents-per-pack cigarette tax increase.

“The biggest agenda piece right now is to insure all kids in Oregon,” said Russ Kelley, the spokesman for Oregon’s House speaker, Jeff Merkley.

The governors association estimated that the national budget for health care expansions in 2008 would be $18.4 billion, including federal allotments.

Lawmakers in many states have pushed for rainy day funds: Georgia, Colorado, Nebraska and Oklahoma are among them.

“We went into the session with a $400 million rainy day fund, which may have been our largest ever,” said Mike Flood, speaker of the Nebraska Legislature. “Times have been good to Nebraska.”

In Oregon, where Democrats gained control of all of state government for the first time in 16 years, lawmakers passed legislation recognizing domestic partnerships, told insurance companies they had to pay for female as well as male contraception and are in the middle of passing bills restricting predatory lending.

“It has been 16 years since we have had a major say in things,” Mr. Kelley said, “so we have had some things pile up.”

In Colorado, where Democrats gained control of both chambers and the governor’s office for the first time in 45 years, bills were passed to prohibit workplace discrimination based on sexual orientation, ban abstinence-only education and allow gay couples to adopt each other’s children.
In Iowa, where Democrats controlled the governor’s office and both houses for the first time in 42 years, the state’s civil rights laws were extended to gays.

In Wyoming, at least one law was passed that cost no money, and required no partisanship. Pascopyrum smithii, or western wheatgrass, has now become the state’s official grass.
Catherine Billey contributed reporting.

Lower Taxes Cause Cash Surplus For States

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