I did teach an introductory course in economics for one semester in graduate school, but I’m not an economist. Nevertheless, some things seem obvious to me. When the state projects its revenue for the coming year, the projection is based on the current level of state spending. When the revenue is insufficient to maintain that level of spending, the state in recent years has made cuts in the coming year’s budget to avoid a deficit. These cuts then reduce future revenue below the projected revenue, necessitating more cuts in the middle of the budget year.
Consider. When the state spends money, it becomes income for someone — state employees, contractors, health care providers, businesses, etc. These people and their employees pay state income tax on the money they receive, I’m guessing at a rate of about 5 percent. Consequently, the revenue for the coming year is automatically reduced by 5 percent of the projected revenue.
More, some of their spending is on items for which the state collects sales tax at the rate of 4 percent. If half of their income is spent on taxable items, that would be another 2 percent loss in revenue for the coming year.
These two things result in a loss in future revenue of about 7 percent.
Further, when people spend that money, it becomes income for someone else, the loss of which results in a loss of more income tax revenue, perhaps 2 percent, and more sales tax revenue when those people spend, perhaps 1 percent. And the cycle of spending continues, as the money continues to circulate, albeit at an ever-decreasing rate, reducing income and sales tax revenue a bit more.
When cuts in state spending on health care result in the loss of federal matching funds, the loss to the state’s economy is even greater.
With a projected budget deficit of $1.6 billion, of which a small portion will be for health care and result in a loss of federal matching funds of about $200 million, the total spending lost to the state’s economy will be about $1.8 billion. That will result is a net loss of tax revenue for the coming year of more than $180 million (10 percent of $1.8 billion). Perhaps more, because I believe my estimates are conservative.
Consequently, we can expect more budget cuts in midyear next year of almost $200 million.