Economic forecaster Michael Evans predicted last week that the Reagan administration's "New Federalism" proposal will leave state and local governments with an $11.8 billion deficit by fiscal year 1987 instead of a promised $4.6 billion surplus.
"In principle it's a good idea, but the staff's arithmetic is lousy," he told the Municipal Finance Forum of Washington. Evans contended the administration has miscalculated both the growth of transfer programs and the revenues to pay for them.
While he accepts the assumption that Medicaid, which the federal government proposes to take over, will grow at 10 percent annually, Evans said that the administration's calculation that the welfare and other programs handed back to the states would increase at an annual rate of just one percent was not supported by experience.
In fact, according to Evans, Medicaid growth historically has been 3 percent higher than that of other programs. So by his estimation, these programs administered by the states should cost $57.2 billion annually by fiscal 1987, not $48.8 billion, as the administration projects.
Likewise, the economist questioned the administration's assumption that the trust fund earmarked for the states would remain constant at $28 billion.
About $16.6 billion of that comes from windfall profits taxes, which, he said, could be expected to decline substantially in the future. This is because as the country switches from old oil, taxed at a 70 percent rate, to new oil, taxed at 30 percent, revenues will be cut in half. He projects $8 billion less than the administration expects.
The administration fact sheet lists $48.8 billion in welfare and other transfer program costs for the states in fiscal 1987, compared with $53.4 billion in revenues and take-backs by the federal government, resulting in a state surplus of $4.6 billion.
Evans' calculations call for $57.2 billion in welfare costs offset by $25.4 billion in Medicaid but just $20 billion in excise taxes for a total of $45.4 billion. Thus the states would have a deficit of $11.8 billion.
Evans, who founded Chase Econometrics and now heads Evans Economics Forecasting Service in Washington, agreed, however, that Reagan was right not to call for tax increases. The various excise taxes being debated last week would not bring about a decrease in interest rates, he said, but rather would damage the economy. Evans argued that excise taxes would lead to higher prices, which would lead to higher inflation.
In other remarks on the economy, Evans said he believes the recession has bottomed out. He predicted the economy would stay in a trough for the next three months and then begin edging up.