No End in Sight for Government Budget Gaps

Last week, Surprise, Arizona was in the news for questionable accounting practices. This week, accountants in Ohio are expressing concerns about the state’s long run fiscal prospects. Ohio used more than $7 bilion from the American Recovery and Reinvestment Act to close this year’s budget gap, but this gap will reappear in the budget once stimulus funds are gone.

J. Matthew Yuskewich, chairman of the Ohio Society of Certified Public Accountants said in The Columbus Dispatch:

“Every month that goes by that they delay acting on that next budget reduces the options they have available to solve that gap,”  If they wait too long, “the only solution available is going to be a tax increase, and it’s going to be a big tax increase.”

Yuskewich hints at an ongoing problem in public finance — the absence of profit and loss calculation makes government slow to adapt to changing economic conditions.  The article goes on to explain the society’s recommendation for a long-term solution to this deficit:

If taxes are in the works, “sin taxes” on alcohol, cigarettes, soda and high-fat foods should be first in line.

While Yuskewich and his colleagues seem to have correctly identified Ohio’s core budget problem, sin taxes are not likely to represent a valid long-term solution. Katelyn Christ and Richard Williams of the Mercatus Center illuminate the problems with these excise taxes.  They are inefficient, regressive, and distort the basket of goods that consumers would otherwise purchase.

Ohio will have plenty of company in budget shortfalls in the coming years.  The Sunshine Review projects that 42 states will face shortfalls in fiscal year 2010. While states do need to find long term solutions rather than relying on bailout funds, they should focus on creating prosperous states through low, broad-based taxes instead of targeting specific goods that policy makers identify as sinful.