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September 15, 2014

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COMMENTARY:

UNR professor: State must be smarter, or start over

Nevada’s economy is in trouble. From 1990 to 2005, we were the fastest-growing economy in the country, and our unemployment rate was usually a little below the national average.

But, in the past year, our total personal income has declined 6.4 percent, the largest drop in the country, and our unemployment rate is one of the country’s highest.

Our economy has been overly dependent on construction and tourism, the most of any state, and both sectors were particularly hard-hit by this Great Recession. Although tourism may recover somewhat as the recession comes to an end elsewhere, our construction sector is coming down from a booming decade that was simply not sustainable.

What worries me, and should worry you, is that our state revenue is extremely undiversified, with a significant portion coming from taxes on gaming and hotel rooms. This tax base has been shrinking even before this recession.

In the mid-1980s, gaming revenue totaled 17 percent of our state’s economic output, but by 2007 it was only 10 percent (and only 8 percent this year). Over the same two decades, total casino revenue — including rooms, food, and beverage sales — declined by a third as a share of our economy.

With a comparable drop in taxable retail sales, our state government has seen its revenue sliced thin. General fund revenue for this past fiscal year was 12 percent lower than the two years prior, when it peaked.

Thanks in part to stabilization funds from the federal government, the Legislature passed a general fund operating budget for 2009-11 that was only 4 percent lower than the previous budget, although higher education was cut much deeper.

Revenue continues to fall below the reduced Economic Forum projections. According to the Budget and Planning Division, we are about $65 million below projections for the first three months of the new fiscal year, a shortfall that is only 1 percent of the current general fund budget, but would be 8 percent if it continued for the 21 remaining months in our current two-year budget cycle.

Meanwhile, Gov. Jim Gibbons still insists that state government has a spending problem, not a revenue problem. This only makes sense if you understand him to mean that any state spending whatsoever is a problem. If you believe that there are essential public goods that must be provided, that public education, for example, is a worthwhile endeavor, then you should be concerned.

Did you know that Nevada’s general fund is limited by law to grow no faster than inflation plus the state’s population growth? The state’s general fund was $390 million in the 1975-77 budget, about 2.8 percent of Nevada’s total economy.

As both our population and the Consumer Price Index are each about 4.4 times higher than 34 years ago, this caps our general fund expenditures at about $7.5 billion for the current two-year budget cycle.

Our general fund budget for the 2009-11 biennium is actually only $6.5 billion, which sounds like a lot but translates to only 2.4 percent of our projected economic output during these two years. How can the governor think this spending is out of control?

As I have said before, Nevada already has the smallest state government in the country, whether you measure it by the number of government employees (as a share of population) or by general fund expenditures (as a share of our economy). How much smaller should it be?

Of course, while the general fund represents the “discretionary” spending under the control of the Legislature, it is only a portion of the entire budget. The state also manages other independent funds with dedicated revenues, such as the highway fund, and receives at least a billion dollars in federal funding that it uses for Medicaid, highway construction and other federally supported programs.

In addition, local governments such as Clark County and Las Vegas have their own budgets that are not under direct legislative control. Our state and local governments together still produce less than $10 billion per year, about 7.5 percent of our total economy. Even together, this proportion is still one of the lowest in the nation.

Could our state government be more efficient? All human institutions are inefficient to some extent, including those in the private sector. Public agencies are harder to manage, and it is harder to measure good performance in the public sector.

Legislatures put more restrictions on state agencies, so they are less nimble and often more bureaucratic. Legislatures may also spend money on programs that provide more political goodwill than economic benefits.

Even so, the idea that there is enough excess capacity to allow for further budget cuts without reducing valuable public services is a fallacy. Furthermore, when private firms reduce their workforces, it is usually because they have fewer customers; when the public sector has its budget cut, it usually finds itself with more people looking for help, people the federal government does not allow us to turn away, as well as more unemployed workers going back to school, etc.

So what should we do about the decline in state revenue? The Legislature already cut most budgets, and included a furlough program for state workers. Now the governor has asked all state agencies to plan for additional cuts as high as 10 percent of the general fund allocation. In higher education, we will now have to cut deeper into meat and bone.

What becomes of our state if our K-12 system becomes even weaker, or if our higher education system — already the smallest in the nation — is forced to cut enrollments?

Gibbons is right that tax increases are a bad idea during a recession, although any economist can tell you the fiscal effect on the state’s economy is less with tax increases than with cuts in government services. Borrowing during good times is usually not a good idea, and many will correctly point out that it is part of what got the country, and most of Nevada’s home-owners, into this mess.

Borrowing during bad times, however, makes more sense, although of course it would have been better to have saved money for such a rainy day. If you lose your job, you don’t consider it a good idea to sell your car, clothes, and house to live on the street, at least not if you ever want to get another job.

Similarly, the state needs to preserve its key assets, and it is not a good idea to let our educational system and other infrastructure deteriorate further — not if we ever hope to bring new businesses into the state.

It is ironic that state governments are effectively counteracting the stimulus efforts of the federal government. Cumulatively, state and local governments purchase 50 percent more goods and services than the federal government.

By cutting spending and raising taxes, state governments are dampening growth in their states that could have been fostered by the federal tax cuts and increased spending. The only reason this situation is not worse is that a large portion of what the federal government has spent so far has been given directly to the states.

How do we get through this crisis without doing long-term damage? Nevada may not need a bigger government, but it cannot afford a smaller one.

Nevada does not need higher tax rates, but it does need a broader, more diversified and less unstable tax base. The governor and the Legislature need to take the time to do the hard work of creating a new tax structure instead of resorting to campaign slogans.

We should delay actual implementation of any new taxes until the state economy has recovered, but institute a reporting requirement so businesses can better prepare, and so our state government can more easily borrow against that future revenue.

We also need to figure out what the next step is for our economy. Nevada has relied on casinos since 1931, and for the past decade we relied on construction. If neither of these will carry us into the future, might it be time for us to reinvent ourselves once more?

Elliott Parker is a professor of economics at UNR, and is chairman of the UNR Faculty Senate.

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