Taxpayers helped state avert budget 'train wreck'

Monday, May 3, 2004

JEFFERSON CITY, Mo. -- The money is flowing freely again from the Missouri Capitol.

The legislature's proposed budget for next year will include big spending increases for education, pay raises for state employees and hundreds of millions of dollars for growth in the Medicaid program for the poor, elderly and disabled. All without a tax increase.

How can this be?

Thank yourselves -- for working and buying things.

Strong income and sales taxes have reversed what many budget prognosticators had warned would be Missouri's worst year yet -- when slumping revenue would collide with rising spending demands to create a financial disaster.

One budget analyst had warned of a "train wreck."

As it turns out, the train is not only on track, it's chugging full-steam ahead.

Consider these starkly different numbers: When Missouri's 2004 fiscal year started last July, Gov. Bob Holden's budget chief assumed that the state's net general tax revenue would decline 0.7 percent compared to 2003.

But based on newly revised figures, budget chief Linda Luebbering said Friday, the state now expects to end its fiscal year with 5.7 percent growth in net general tax revenue.

The scope of that miscalculation might be more embarrassing if the news weren't so good.

Iraq had little effect

Luebbering said economic forecasters had assumed the war in Iraq and unstable oil prices would hold down consumer spending and investment, resulting in a slow economic turnaround. Plus, Luebbering expected the federal tax cuts enacted by President Bush would have a trickle-down effect of reducing state tax revenue.

Yet the ongoing war and spiking motor fuel prices seem to have had little negative effect on consumer spending. State sales tax revenue is now expected to grow by 5.8 percent this year, compared to last year.

Similarly, Luebbering says, the federal tax cuts did not result in the expected rise in state tax refunds. In fact, the state may end up paying out less in income tax refunds than last year, she said. Net individual income taxes are now expected to grow 5.5 percent this year.

Together, individual income and sales taxes make up more than four-fifths of Missouri's general tax revenue.

Although they are a much smaller proportion of the total, corporate income and franchise tax collections may reveal the most about Missouri's economic turnaround. Luebbering had projected corporate taxes to decline 18.5 percent this year. The latest figures now show an 8 percent growth, she said.

The growth in corporate tax revenue has even exceeded the original projections used by House Budget Committee chairman Carl Bearden, R-St. Charles, who long doubted the "train wreck" scenario and, as it turns out, fairly accurately predicted the economic turnaround. The legislature's budget for the 2004 fiscal year assumed a 5.1 percent growth in net general revenue.

While working on a budget for the 2005 fiscal year, Bearden has gone outside the traditional realms of government-related economists to hire his own expert to study the individual economic aspects that have driven Missouri's tax base over the past dozen years.

Whereas Holden in January proposed $520 million in higher taxes and revenue to help fund an $18.8 billion budget for the fiscal year starting July 1, the legislature now is poised to approve a similarly sized budget while assuming little to no tax or revenue increases.

Next year's budget, which must be passed by Friday, is built almost entirely on the growth of existing state tax sources and the carry-over of about $250 million that won't be needed for this year.

Still urging caution

Yet Bearden and others now are urging caution as Missouri government begins to return to a spending -- instead of cutting -- mode. The legislature's budget for next year is likely to be built on a growth rate between 4 percent and 4.5 percent, a historically typical annual rate.

"Even though things are getting better, it doesn't mean that we should open the purse and continue on as we were," Bearden said. "We still should take some looks at things."

Yet that may be difficult for lawmakers pressured by public schools, universities, social services groups and others to make up for several years of lower spending.

"There's probably a whole lot more pent-up demand out there, but people are probably still in shock, so they're not asking for more -- they're happy with a tiny amount more, or no more cuts," Luebbering said. "I think that will change significantly next year. There will be a whole lot more requests for increased funding."

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