Sunday, April 19, 2009 | 2 a.m.
The Carson City budget dilemma is often phrased like this: Raise taxes or cut spending and services?
In the end it’s likely to be some combination. But economists say neither is good for a struggling economy.
Raise taxes too much, you hurt businesses. Reduce government spending, by laying off employees, cutting pay and health care coverage, and you’re taking money out of the economy and eliminating services when people need them the most.
What if there were another way?
Elliott Parker, a professor of economics at the University of Nevada, Reno, says the best thing to do is borrow money to avoid big spending cuts and pay it off later, when the economy rebounds.
Before some ignite another run on tea bags, the tea party reenactors who turned out in Carson City and Las Vegas Wednesday to decry federal deficit spending, should hear Parker out.
The professor agrees the federal situation is awful. “I’m a deficit hawk in general,” he said.
During good times, government should pay off its debt, which didn’t happen under President George W. Bush.
In bad times, though, government needs to spend to stimulate the economy.
For Nevada, that would mean borrowing. Parker says such debts should be paid back quickly with new taxes passed this session but implemented in a year or two, when the economy rebounds.
“It is a false choice to think that this reduction means we have to either gut our educational system and other public services, or raise taxes during a recession,” he wrote in an e-mail. “The only time borrowing is appropriate is to smooth out the provision of public services during a recession without raising taxes. Borrowing to keep taxes low and spending high in the long run is a terrible idea. Borrowing to prevent taxes from being raised or spending being cut in a short-run recession is a good idea.”
The spending solution is often advocated by economists. The federal government learned that lesson during the Great Depression, after President Herbert Hoover tried to balance the federal budget by raising taxes and cutting spending.
“Trying to cut expenditures and raise taxes during a severe economic downturn is a bad idea,” Parker said. “If you have to choose, it is better to raise taxes than to cut expenditures, but it is best to do neither.”
He points to economic analysis showing some government spending, on things such as food stamps and extended unemployment benefits, has a greater financial return to the economy than tax increases hurt the economy.
But Nevada has to balance its budget, right?
That isn’t the case.
Through the early part of the 20th century, Nevada regularly issued bonds to balance its budget, then-state archivist Guy Rocha told the Sun last year.
The state borrowed money in 1881, after a rash of bank closures and as the mining industry faltered. The Supreme Court weighed in after the debt was challenged and ruled that the Legislature has the power to issue debt “at any time.”
To pay back the loan, the state raised taxes on property and mining, Rocha said.
In December, the Legislature, with Gov. Jim Gibbons’ approval, passed legislation to allow lawmakers to borrow up to $120 million to reduce the budget gap.
Still, tax policy is set in a political process. With the bad reputation deficit spending has, legislative leaders say it’s unlikely the state will borrow to avoid budget cuts.
Controller Kim Wallin, the state’s chief fiscal officer, noted the example of California, which issues bonds even in flush years to cover operating costs.
“To borrow money is irresponsible,” she said. “It’s just going to put off the inevitable — we have to raise taxes.”
A Democratic legislative source made a sour face when asked about the possibility of borrowing to balance the budget. “We don’t borrow.”