Deficit Spending "or Raise Revenues"

According to a March 26-28 USA Today/Gallup poll, the top four issues in the 2010 elections will be:

1. The economy
2. Healthcare
3. Unemployment
4. The federal budget deficit

Financial matters impact all of us, and in the interviews of local candidates in the Daily Citizen the past few weeks, many candidates have talked about their ideas to help grow the Searcy economy.

Many of us are also concerned about government spending and deficits. President Barack Obama has pushed for increases in government spending to stimulate the economy. However, the Joint Economic Committee of Congress said in a past report on government spending,

"Economic growth is created over the long run by a labor force which possesses the incentive to work and produce, and by entrepreneurs who have incentives to invest in capital stock. Through excessive spending, the government negatively affects the long-run economic growth rate of a free economy. Government spending reduces labor force participation, increases unemployment, and reduces productivity."

The benefits and harmful effects of government spending continue to be debated across the country. Those of us who do not live within our means (spend more than we earn) will eventually end up broke. Governments face the same fate if they spend more than they receive except for one key difference: All levels of government can levy taxes on us to make up for their poor spending habits.

In our previous post on the growth of spending by the Searcy government and attempts to raise taxes to pay for that spending, we discussed the push over the past eight years to grow city spending. We have added more sources to that post. Let's look at some of the information from the tax time line in more detail.

Deficit Spending
Deficit budgets over the past five years have grown the city's spending as one year's deficit spending becomes the next year's "budgeted" spending.

In the December 2005 and January 2006 debate over the 2006 city budget, the City Council and Mayor Belinda LaForce disagreed over the 2006 budget because it proposed deficit spending. In a December 21, 2005, article in the Daily Citizen, Mariea Grayson reported that "LaForce's budget remains $268,482.08 in the red." The article quotes Mayor LaForce's view of the 2006 budget,

"'I want to appropriate money from the reserves to take care of the deficit.' LaForce told council members."

"'In the first of 2005, they appropriated $190,000 or more out of the reserves,' LaForce said, 'All I'm asking is they do the same thing in 2006.'"

"LaForce said there are only two options left to the city. 'We either pull it out of the reserves or raise revenues,' she said."

Mayor LaForce proposed this deficit budget December 13, December 20, January 10, and January 11 and insisted on using the reserves rather than cut spending. The budget passed January 11, 2006, with Mayor LaForce casting the tie-breaking vote. Mariea Grayson reported in a January 12, 2006, Daily Citizen article,

"Searcy will have to make up $268,482 with reserve funds or other unknown income."

"LaForce said she doesn't understand the problem the council is having appropriating money from unappropriated funds to cover the budget."

Mayor LaForce proposed deficit budgets for both 2005 and 2006 using reserve funds (the city's saved up, unallocated money from more "revenues" coming in than anticipated) to make up the difference. Mayor LaForce repeated this practice of using reserve funds with the 2008 budget. According to a December 13, 2007, article "Will 2008 be in the Red?" in the Daily Citizen, her proposed budget called for using $300,000 from reserve funds. The initial 2010 budget Mayor LaForce proposed called for deficit spending. From January 2009 to September 2010, the city's reserves have declined from $2.267 million to $1.201 million according to the city's financial statements.

"Or Raise Revenues"
In the 2006 budget debate, Mayor LaForce said the city only had two options to make her budget work, deficit spending "or raise revenues." In December 2004 as the City Council passed her deficit budget, she called for a tax increase (December 16, 2004, Daily Citizen article). This call became a proposal in April 2005 for "a sales tax that begins as one full cent, then drops to one half cent after one year" (May 1, 2005, Daily Citizen article). The city council rejected this proposal in favor of "a nine month, short-term, 1 percent sales tax" "to construct the new station" (June 21, 2007, Arkansas Democrat-Gazette article).

After casting the deciding vote on a 2006 deficit budget, Mayor LaForce called for "a permanent sales tax increase or increase in city service fees for 2006" in her State of the City address (February 16, 2006, Daily Citizen article). In June 2007, Warren Watkins wrote an article for the Daily Citizen that listed Mayor LaForce's proposals for raising city revenues:

• "a permanent one-cent city sales tax"
• "a one cent tax, half of which sunsets after five years"
• "one cent that sunsets incrementally over 10 years"
• "one cent that sunsets after 10 years"
• "one cent that sunsets after five years"
• "a bond finance issue for capital and street projects, half of which sunsets at payoff"
• "increasing current fees" for city services such as licenses, inspections, garbage collection, etc.
• "increasing property millage up to five mills" from the "current rate dedicated to the city" of "0.8 mills"
• "raising impact fees for infrastructure improvements"
• "beginning an Advertising and Promotion sales tax"
• "a county-wide one cent sales tax in which the city would receive a portion"

The proposal the City Council put the voters in 2007 was "the levy of one percent gross receipts tax within the City of Searcy which shall expire after three years," which passed and was set for a September 11 special election in the June 26, 2007 City Council meeting. In the "Sales tax hike fails" article in the September 12, 2007, Daily Citizen, Warren Watkins reported that the voters rejected this tax by a 2-1 margin.

After a new group of aldermen were elected in 2008, Mayor LaForce then turned to the A&P tax proposal she had originally made in June 2007, which the City Council passed 5-3 in May 2009. This tax of 1 percent on all prepared food and 3 percent on all short-term (less than 30 days) rental of accommodations was rejected by Searcy voters in April 2010 after a battle between citizens and the city government to allow a vote and after Mayor LaForce stated in her March 19, 2009 morning radio appearance on News Talk 99.1 that the A&P tax would not be enough for capital projects like a convention center, which would require an additional sales tax increase.

The Chicken and the Egg
The classic philosophical causality question of the chicken and the egg involves trying to determine which came first. Some causality questions are easier to solve. In the past five years, deficit budgets were followed by tax proposals enough times that it is clear which came first.