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State politicians insist that tax increases are needed to solve the budget problems, ironically ignoring the fact that perhaps their continued increases in spending are what is responsible for their state budget problems.
The Cato Institute has released its biennial Fiscal Policy Report Card on America’s Governors. As always, it is an indispensable review of the tax and spending polices being pursued in each state from the perspective of a leading limited-government think tank.
This comes at a time when state governments are beginning to suffer the consequences of their lack of spending restraint during the late 1990s economic boom. States are now facing a combined budget deficit of $40 billion. As was the case during the last economic slowdown in the early 1990s, many governors and legislators have chosen to cope with these budget shortfalls by contemplating tax increases rather than reintroducing fiscal discipline. States have recently passed tax hikes totaling $6 billion, the largest combined increase since 1992. The concern for deficit reduction that motivated most of these tax increases did not prevent the average state government from increasing spending this year.
It is a familiar pattern. When the economy grows rapidly, state revenues surge and are poured into new spending programs. Demand for these programs does not wane when the economy contracts. The result throws state budgets out of balance. Attempts to rectify the situation by raising taxes are usually self-defeating, as they do more to further depress economic growth than they do to increase revenues.
Nevertheless, few state politicians seem inclined to learn from the fiscal irresponsibility of the past. Excluding federal transfers, the current dollar amount of state spending more than doubled from $303 billion to $638 billion between 1990 and 2000. This slightly outstripped states’ excess during the 1980s economic boom; inflation-adjusted state spending grew 3.7 percent annually during the ‘90s compared to 3.4 percent annually during the ‘80s. Between 1996 and 2001, state general fund spending rose even faster than federal spending, 39 percent versus 19 percent. The Cato study notes that state spending grew 5 percent in 1997, 5.7 percent in 1998, 7.7 percent in 1999, 7.2 percent in 2000 and a whopping 8.3 percent in 2001.
But didn’t many states pass irresponsible tax cuts that depleted
their budget surpluses? Aren’t tax-cutters equally to blame? The
short answer is a resounding “no.” Since 1996, two-thirds
of state surplus dollars have gone into increased spending rather than
reduced taxes. Colorado Gov. Bill Owens, the highest scorer on Cato’s
report card, said it best: “States do not have a revenue problem.
They have an overspending problem.” Colorado has constitutional
tax and spending limitations in the form of the Taxpayer’s Bill
of Rights that prevented the state budget from growing as rapidly as
it did elsewhere during the 1990s. Owens pressed for tax cuts in excess
of the TABOR-mandated refunds, cutting the flat-income tax rate from
5 percent to 4.63 percent and lowering taxes on capital gains, interest,
dividends and business property.
Additionally, tax cuts promote economic growth. Cato compared the economic performance of the ten states that cut taxes the most from 1990 to 2000 with the ten states that raised them the most during the same period. Job growth averaged 25 percent in the tax-cutting states compared to just 9 percent in the tax-raising states. The average unemployment rate in the tax-raising states was .2 points above the national average, but .4 below in the tax-cutting states. Personal income growth in the tax-raising states lagged 14 points behind the national average. Personal income grew by 57 percent in these states while it went up 74 percent in the tax-cutting states. The ten biggest tax-cutting states also had better bond ratings as of 2000 than the ten biggest tax-raising states.
Republicans are expected to lose some governor’s mansions in the 2002 elections. The Cato report card suggests that many of them have squandered their opportunities to work on behalf of the taxpayers. The average grade for Republican governors was C-, only slightly better than the D+ average earned by the Democrats. Cato’s analysis of the results states: “There is a surprising lack of fiscally conservative stars in the current field of GOP governors. Most Republican governors have fiscal records more closely resembling that of Nelson Rockefeller than that of Ronald Reagan.”
Some Republicans have amassed records more closely resembling Mario Cuomo and Michael Dukakis. Tennessee Gov. Don Sundquist has been crusading for a state income tax for the past four years, despite prior campaign promises to the contrary. He has been overwhelmingly rebuffed in these efforts, but has succeeded in winning approval for other tax hikes he argues are necessary to balance the budget. His concern for balanced budgets has not led him to reform Tennessee’s disastrous TennCare government health care program or otherwise restrain state spending. Ohio Gov. Bob Taft has also proved to be a big spender who attempts to deal with budget shortfalls primarily through proposing higher taxes. Sundquist and Taft both were given F’s alongside liberal Democratic Govs. Gray Davis of California and John Kitzhaber of Oregon. Other poor Republican performers included Michael Leavitt of Utah, Jane Hull of Arizona and Illinois’ positively awful George Ryan.
However, the news isn’t all bad. Florida Gov. Jeb Bush has a fiscal
record well to the right of the one his brother has thus far compiled
as president. He was the only governor to receive an A besides Colorado’s
Owens. New Mexico Gov. Gary Johnson has been a hard-liner on government
spending, using his veto pen 750 times. Kenny Guinn of Nevada has also
held the line on spending while Georgia Gov. Roy Barnes has been a fiscally
conservative Zell Miller Democrat.