Facts about the state budget

With many claims, numbers and narratives circulating about the state budget, what are the key issues? To answer that, we researched state records and analyzed:

-- The gap between the spending that would be required to maintain current state service levels and the revenues expected the next two years under current state law.

-- The growth in state spending levels versus the growth in our economy and individual incomes to determine the extent to which that gap is due to spending growth, low tax rates and the Nevada Depression.

First, the gap is $2.4 billion: spending of $7.7 billion versus revenues of $5.3 billion. Closing that gap requires 31 percent spending cuts or 45 percent tax increases -- or some of both.

The gap is the product, first, of the mid-2011 expiration of $1 billion of taxes. Another $700 million is due to cost increases in the next biennium mandated by state and federal law, $600 million more to the expiration of federal "bailout" funds given to Nevada, and $100 million to tax revenue declines expected from the current biennium to the next one.

Our analysis assumes no cost-of-living or other pay increases for state employees.

Second, while state revenue declines due to the economic downturn caused more than half the gap, more than $1 billion of it results from rapid spending growth since 2000.

Contrary to claims from specific beneficiaries of state spending (public employees, vendors and subsidy recipients), there have been only minor recent reductions in some state spending, not a series of Draconian cuts anywhere. In fact, state K-12 education and human services spending rose faster this decade than all other categories of state spending and all major state spending categories grew much faster than our economy and incomes.

Because Nevada had its two largest tax increases in the past eight years -- totaling almost $2 billion -- the inescapable conclusion is that Nevada has spending and economic downturn problems, not a problem of unduly low tax rates.

People in the private sector have suffered much greater cuts in employment and pay levels than have public employees supported by their tax dollars. Over the past 43 months, 16.6 percent of private-sector jobs in Nevada have disappeared -- more than 190,000 jobs lost. The number of state employees has declined from its high-water mark by only 2.5 percent.

Further, total state spending rose annually through fiscal year 2009 and was essentially constant from FY09 to FY10. This decade, state spending has grown 31 percent faster than our economy and Nevadans' incomes. State higher education and public safety spending fell an average of less than 1 percent per year from FY08 to FY10. However, driven by large increases in human services and K-12, total state spending grew by 9.5 percent over that time, while Nevadans' incomes dropped by 6.1 percent -- a 15.6 percent difference favoring the public sector.

In short, private-sector taxpayers -- families and businesses -- have been devastated by a depression that is greatly the product of excess public-sector taxing, spending and regulation. Yet they have been required, via tax increases, to keep Nevada public employees, vendors and recipients of state subsidies insulated from the great majority of the effects of that depression.

Our report also discusses the reasons that claims about "budget cuts," especially "Draconian" ones, are generally bogus and misleading. The meaningful data are actual spending levels, not budget amounts that can be manipulated in self-serving ways spending data can't.

Any decline in Nevada K-12 educational quality happened despite rapidly increasing education spending, while structural reform was completely absent; that greatly exacerbated Nevada's education problems. There are low-cost reforms that the education bureaucracy successfully opposes that could improve educational results.

Finally, increased spending or any policy to improve education -- which we greatly need to improve -- cannot improve work force quality in time to reverse any cyclical downturn. So claims that education or research spending will end this depression are false, even though such spending promotes economic diversification and growth in the long run.

Low tax rates do have timely counter-cyclical effects, and they promote long-term economic growth.

So our challenge is to combine optimal tax rates and education reform.

Ron Knecht, of Carson City, is an economist and chairman of the Board of Regents Business and Finance Committee. Lynn Hettrick, of Gardnerville, was deputy chief of staff to Gov. Jim Gibbons from 2009 to 2010 and served as a Republican in the Nevada Assembly from 1993 to 2006.