Bush Wants to Borrow More To Pay For More Tax Cuts

by Mike Godfrey, Tax-News.com, New York

27 December 2002

The balmy days of budget surpluses and booming tax revenues are over with a vengeance in the US, as the Bush administration goes cap-in-hand to Congress for a higher borrowing limit, and the states fight off a threatened budget deficit in the current year of nearly $50bn.

The request to Congress to increase the current statutory debt ceiling from $6.4 trillion met with predictable criticism from Democrats, blaming President Bush's tax cuts for the government's need to borrow more. Indeed the administration is insouciant about the worsening fiscal situation, and is quite likely to use a bigger debt envelope to accommodate yet more tax cuts in order to stimulate the economy.

One place any extra borrowed cash probably won't end up is in the hands of the states, even though 31 of them face budget deficits. They have whittled down the total predicted deficit from $50bn to about $17bn, mostly through spending cuts, but are now looking at really hard choices.

The states' pleas for help from the federal government are likely to fall on deaf ears, however. The administration doesn't believe that they have done enough to trim lush spending programs instituted during the gravy years, and points to Michigan as an example of what can be done: John Engler, a Republican governor who took office in 1991, inherited a state in recession and running a $1.8 billion deficit. He cut an entire department, reducing the number of state employees by 5,000, and terminated a welfare program that provided benefits for 80,000 people. Then he pushed through a series of tax cuts, and the Michigan economy boomed, sending per capita income up to 2.8% above the national average, thanks in no small measure to lean government, says the Cato Institute, a libertarian think thank and advocate of tough cost cutting for states.

Not all economists agree that belt-tightening is the answer to the states' problems, however. Reduced state budgets are already expected to offset one half or more of the fiscal stimulus being provided by the federal government next year. Of course, that's just what supply-siders want: to replace government expenditure with private sector expenditure. As long as the states don't just pile back on the taxes when the economy allows it!

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