Rainy day funds really shield excessive taxation by government

Last week, Gov. Sonny Perdue gave his State of the State address. The state of our state is not pretty. The current unemployment rate in Georgia is 7.5 percent, which is above the national unemployment rate of 7.2 percent. Many parts of Georgia have poverty rates creeping above 30 percent. Our hometown of Macon has a rate of 33 percent. Some of our most reliable employers are downsizing; others are closing their doors completely. As a result of the current economic state of affairs, the state of Georgia needs to close the gap on a $2.2 billion deficit.

To help eliminate our deficit, the governor has called for substantial cuts in state funding. Many departments have been asked to cut their budgets by 8 percent. Despite the support they get from the HOPE program, the Georgia University System must cut their budgets by 6 percent. We can also expect plenty of new taxes in the future.

To deal with the budget crisis, Georgia residents can soon look forward to taxes on hospitals to collect more revenue from Medicaid patients, taxation of strip clubs to support child abuse programs and property tax increases in many parts of the state to cover cuts in the homestead exemption.

Despite the massive spending cuts and likely tax increases, state coffers will still come up short. To cover the shortfall, Perdue expects to dip into Georgia’s rainy day fund, which currently stands at about $1.2 billion. From this fund, he expects to withdraw only $237 million to balance the 2009 budget and only $400 million to balance the 2010 budget.

In all honesty, it is not just raining outside, it is pouring. When it’s pouring out, one would think the rainy day fund would be there to help. So, why be cautious at this moment and leave the rest?

In theory the money in the rainy day fund is supposed to come back to us during weak economic times. In practice, however, we are seeing the government’s resistance to release a pot of treasure they mistakenly think is theirs.

We believe Perdue’s cautious approach to the rainy day fund comes from a basic misunderstanding of surpluses. Surpluses for a household can generally be understood as a good thing — they represent money left over after all consumption has occurred. More importantly, household surpluses lead to savings, which allows for future consumption and investment. Surpluses for the firm are desirable because they are the profits flowing to entrepreneurs after all expenses have been paid; it is surpluses to firms that encourage innovation and new business start-ups.

Surpluses for government are, however, an entirely different beast. Government surpluses are the result of people being overtaxed in the past. When the government takes more in than they pay out, the money sits idle in low or no-interest accounts. Money sitting idle in the coffers of government has an opportunity cost. The money could have been used by taxpayers instead.

In addition to yielding low rates of return, there is a second internal flaw with rainy day funds: The larger the fund becomes, the more politicians become tempted to make use of the funds for their pet projects. Over time, money that could be used productively in the private sector instead evaporates in the offices of new governmental departments and initiatives.

Thus, while rainy day funds may, at first glance, appear to run hand in hand with responsible and prudent government, they should instead be understood as excessive taxation by government. Excessive taxation leads to excessive spending, which may help explain the need for cutting the budget now.

• Scott A. Beaulier is chairman of economics at Mercer University. Skip Mounts is interim dean of the Stetson School of Business and Economics at Mercer.