When hunting for trend-setters, most people today would look to coastal settlements like New York or California. Few would consider the junction of the Allegheny, Ohio, and Monongahela rivers as the place that is giving us a look into our own futures.
Pittsburgh is a nice place, but trendissimo it is not. It is far too busy with real life for that.
It is a city, however, that is building a reputation for itself as being on the leading edge of regional redevelopment concepts. Unfortunately, it is also on the leading edge of some financial problems.
Pittsburgh is wrestling with an interesting financial issue that is lurking in every city hall, county seat and state house in America. It is largely silent and unseen, although it does give off its own distinctive scent.
It is the cost of funding the retirement of public employees.
Recently, the mayor of Pittsburgh was faced with a budget that was out of balance by the $15 million needed to fund the public employees retirement fund. This is, generally, a legal obligation, not a discretionary expenditure — a “fixed cost.”
The mayor’s solution was to propose a 1 percent tuition tax. This set off protests from all sorts of people — students at first, then educational institutions — and the usual threats of litigation.
The litigation folks will probably prevail, and it is not likely that the tuition tax will go into effect until the idea is tested at least through the Pennsylvania court system. During the early-stage protests and hearings, the idea raised so many related issues of “fair share” of public costs by nonprofit operations, including schools and hospitals, that it is difficult to predict the outcome.
What gets lost in the three processes — news media, political and legal — is the basic issue that touched this mess off. Pittsburgh’s municipal budget was $15 million short. There are two ways to address a budget shortfall: additional revenue or reduced expenditure. The mayor chose to look only at the revenue alternative and came up with a new tax to provide the money.
He is not alone in this approach to public sector finance. In fact, for some time now, it has been the routine practice, as is the now-ritualized “presentation of the choices” to the public. At the city level, this typically involves statements like, “Without additional revenue we will have to lay off every police officer and impose a three-day response time for 911 emergency calls.”
At the federal level, of course, the process is more sophisticated, in no small part because Congress has access to the treasury and is not bound by either law or tradition to balance the budget.
Health care reform and the economic stimulus bills, for example, both involve big-league expenditures, but little, if any, attention has been given to how to pay for them. The expression “tax increase” has been assumed, and even spoken of … but not very loudly or clearly.
Exactly what form that tax increase might take is not certain, but one possibility mentioned by House Speaker Nancy Pelosi is something called a value-added tax. In case you missed the discussion of this tax — and, with any luck, you did — it works a lot like a national sales tax and has been popular with European governments.
For many years the federal government has been financing its operations with borrowed money, mostly from China. The consequences of this are not attractive at all, with inflation and recession being at the top of the probabilities list, followed by something called “stagflation,” where prices go up but output and employment stagnate.
A tax increase, then, would make some sense, only if it were to be used to bring revenue and expenditure into balance. It would be painful, for it would probably slow down any economic recovery. But at least it would make some sense.
But it makes no sense at all to use a tax increase, no matter how imaginative or efficient, to provide continued financing of a ever-higher level of public expenditure we cannot afford now,
Neither a “tuition tax” for a Pittsburgh, nor a VAT for a Congress with the bit in its teeth, will solve the problem of public sector overspending.
New and more imaginative taxes are not the answer to every problem. Sometimes reducing spending is the right thing to do. Call it economic health care reform.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.
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