How should state policymakers approach e-cigarettes?
One of the questions of economics teaches you to ask is ‘compared to what?’ Someone might tell you that a job paying $10 an hour is bad, but any reasonable…
The city of Elmo is facing a deficit in its budget. This is because due to an accounting error, the city underestimated the amount of tax revenue it needed for two years. The city, therefore, “did not ask for enough” money from its residents and suffered a shortfall of $200,000 in 2019 and $275,000 in 2020.
According to the city administrator, Kristina Handt, “Taxes in Lake Elmo increase by only 2 percent for the 2020 levy. But if the correct amount had been levied, the increase would have been 8.1%.
Governments generally have two options for handling deficits; they raise taxes or reduce spending. But according to Lake Elmo’s city administrator, cutting spending would be a difficult way for the city to close the deficit. This is largely due to the fact that,
In addition to the effects of the coronavirus pandemic, the city is facing large increases in expenses in other areas, including:
(1) 19 percent increase for services of the Washington County Sheriff, which is hiring another deputy.
(2) 24 percent increase for the Fire Department, hiring a full-time firefighter.
(3) 64 percent increase in the budget of the Building Inspections Department. “We are a growing community. We are adding 250 homes a year,” said Handt.
(4) 10 percent jump in the costs of health insurance for all employees.
So the city will probably go forward with raising property taxes, on top of the already scheduled raise due to increase in property values.
Rational individuals and businesses generally do not increase spending in times of low revenues. Instead, they may reduce spending or even increase savings, especially if its a time of uncertainty. This is because if they do not take these measures, they would have to face the consequences of overspending.
For a business, overspending means having to increase its debt, which is financially undesirable, or go out of business. For an individual, the options are also similar; increase borrowing or reduce consumption sometimes effectively close to zero, which is undesirable. The cost of borrowing on both individuals and businesses have to fall directly on the borrowing party.
None of these issues, however, befall governments. Governments usually do not directly bear the consequences of overspending. If governments have to borrow, these costs of borrowing in actuality are distributed among taxpayers. The same is true for any projected increase in spending. To the extent that raising taxes does not significantly reduce revenue, governments have no incentive to cut spending, they instead choose to rely on raising taxes. For instance, just two years ago, Lake Elmo instated a 22% increase in property taxes on its residents to fund increased general fund spending. And the city is doing the same thing today instead of cutting spending.