1. "Expenditure rises to meet income."
In his 1960 book The Law and the Profits, Parkinson noted that bureaucracies, public and private, will usually find ways to spend pretty much whatever money comes in. That is, they don't build their annual budgets from the ground up. They discover the level of expenditure they can finance without breaking too much of a sweat, then work backward to justify that level as "essential" to meet the institution's "needs." The problem is exacerbated in governmental settings because there is no search for profit and few competitive pressures to tame the natural appetite for spending.
Among the states, it is notable that most of the governments with the biggest fiscal problems during the last two years don't fit the profile suggested by superficial media reports. Let me say first that I define "big fiscal problems" differently than some do. After a dozen years of experience closely watching a state legislature in action, in my home state of North Carolina, I can testify that projections of state budget deficits, which are what get reported to the outside world, usually are the result of political calculations as well as mathematical ones. So don't pay too much attention to whether a state "projects" a $1 billion deficit or a gap three times that amount. I can "project" a $100,000 deficit in my own household finances next year based on the fact that the vacation home my family "needs" to purchase cannot be financed at my current level of income. Similarly, governors and legislatures looking for excuses to raise taxes can and do manipulate budget numbers to project massive deficits on the basis of pie-in-the-sky expectations for state employee raises, new programs, and the like -- even excessive projections of growth in admittedly burgeoning programs such as Medicaid.
A better way to measure the relative magnitude of fiscal problems is what governors and legislatures actually do about them. Since 2001, reports the Rockefeller Institute of Government, 20 of the 50 states have enacted "significant" tax increases (amounting to at least 1 percent of general fund revenue), with 10 of those raising broadly applied tax rates on items such as individual income or retail sales. (The rest have mainly fiddled around with excises on cigarettes.) If the NGA/NCSL establishment is correct, then the states with the lowest rates of taxation to start with or the highest rates of expenditure growth over time, or both, would be the most likely to resort to tax hikes to bail themselves out of fiscal fixes. But no such pattern exists. About as many of these tax-raising states have fallen below the national average in spending growth in recent years as have exceeded it. Similarly, a slight majority of the tax-raising states were above average in tax burdens before the recent recessionary budgets, so it would be hard to argue that their resort to tax increases was due to some sort of basic inadequacy or to excessive tax cuts in the past.
The fiscal data offer even worse news for those who believe the states need to rely less on the archaic and regressive sales tax and more on progressive income taxes. This policy prescription is intended to head off future fiscal crises by allowing state revenues to track more closely the dynamics of our service-driven economy. Since a sales tax is essentially limited to physical goods, it is argued, it will inevitably fail to keep up with an economy increasingly composed of service industries that aren't taxed at retail. Income taxes pay no attention to whether goods or services are being sold and are thus supposed to be a more robust revenue source in the New Economy.
But seven of the 10 states that have been "forced" to raise broadly applied taxes in the last two years were already more heavily reliant on the income tax than the average state. And the only two states to have raised these taxes in both 2001 and 2002, New Jersey and North Carolina, already had the sharply progressive income tax systems that allegedly would be best. New Jersey had six rates that topped out at 6.37 percent for single taxpayers making more than $75,000. North Carolina's top rate was even higher: 7.75 percent for those making at least $60,000. (A 2001 tax bill added yet another rate of 8.25 percent for income above $120,000.)
Heavy reliance on progressive income taxes is actually a recipe for more budget woes. Other things being equal, it gets states into trouble because of what might be called fiscal turbulence. Rising incomes, supercharged in the 1990s by big capital gains, push more taxpayers into higher tax brackets. This accelerates the growth of tax revenues above the rate of overall growth in incomes and the economy. Flush with cash, state lawmakers create new programs to satisfy various "unmet needs": class size reduction, infrastructure construction, health care, and the like. Yes, they may also create a small savings account or toss off a few tax cuts to mollify fiscal conservatives, but rarely do they make fundamental changes such as lowering marginal rates. (Indeed, the much-hyped "deep" state tax cuts of the 1990s only partially offset the tax increases that legislatures had imposed during the 1990�91 recession.)
Of course, what quickly goes up can quickly come down. When boom yields to bust, and especially when capital gains booms yield to stock market busts, states dependent on progressive income taxes see their projected revenues fall faster than average as households and businesses shift to lower brackets. The result is a large, unforeseen hole in the budget.
Parkinson's insight here is that it's not really projected budget deficits or the perceived need for more spending that guides fiscal decision making. It's a breeze for politicians to justify new government expenditures, at least to themselves. What they struggle with is how to justify higher levels of taxation. They see recession-driven drops in revenue growth as prime opportunities to sell higher taxes. Rarely do they go back later, when the economy recovers and coffers are bulging, to repeal all or even most of their previous increases. It's a ratchet effect, similar to the one the historian Robert Higgs has observed in federal government growth during times of war.
2. "Work expands so as to fill the time available for its completion."
This is the most famous of Parkinson's laws. Anyone familiar with elastic deadlines can immediately grasp it.
In the state government context, the implications are subtle but critical. Most state legislatures operate under time constraints. They begin their regular sessions in January and end on a fixed date, often in March or April. But 10 states extend their regular sessions beyond four months a year, and another 10 operate without any meaningful restriction on how long they can meet in regular session. Interestingly, 13 of these 20 states are also among the 20 that have raised taxes during the last two years. Three additional states with lengthy legislative sessions -- New York, Missouri, and South Carolina -- may enact tax increases in 2003.
Why do legislatures that meet longer tend to end up with larger fiscal problems and a greater recourse to hiking taxes? Because the Parkinsonian "work" lawmakers do to fill the time allotted to them consists to a large extent of sitting in committee meetings at which a parade of government managers, state employees, and special interest lobbyists make the case for how much their pet program is "needed" and would be "sliced to the bone" unless the state raises taxes. Other "work" involves dreaming up new programs or pork barrel projects to attract media attention.
Furthermore, the longer a politician is parked in this big-government echo chamber, the more he or she forgets any previous convictions about limited government or the need for frugality. Average taxpayers, after all, don't spend much time lobbying and cajoling politicians in the often distant state capital. Studies from the Competitive Enterprise Institute, the National Taxpayers Union, and my own organization, the John Locke Foundation, have confirmed a version of this effect for long-serving members of Congress and state legislatures. The more years a politician spends in office, the more he or she votes for bigger government. It's no great stretch to expect a similar effect based on how much time state legislatures spend in session each year.
Sometimes the link is even more direct than that. Michael LaFaive, director of fiscal policy at the Michigan-based Mackinac Center for Public Policy, relates the story of how his state's legislature reacted in 2000 when an unforeseen surplus of $600 million materialized. By midyear it was already evident in the stock market and elsewhere that the national economy was clouding up. But instead of banking the funds for a rainy day, Michigan lawmakers went on a spending spree. "This might not have happened had we had a part-time legislature," LaFaive says, "because it probably wouldn't have been in town to react impulsively" to the discovery of the surplus. As it was, only two House members out of 110 voted against the spending measure, which included a $10 million polar bear exhibit at the Detroit Zoo and a $5 million aviation museum in Kalamazoo.
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