Commentary

Fiscal Strategies for the States

During the past few months, fiscal conservatives have sharply criticized the Bush administration’s fiscal record. However, the performance of Republicans at the state level leaves little to cheer. Currently, there are 12 states where Republicans control both the executive and both chambers of the state legislature. Fully half of these states hiked taxes in 2003. In fact, tax increases were more likely in those states where Republicans possess unified control of government.

Worse, Republicans were some of the most notorious tax hikers of the summer. For instance:

  • Bob Riley, Alabama’s first Republican governor since Reconstruction, proposed raising taxes by $1.2 billion. The citizens of Alabama will get a chance to vote on this tax hike on September 9.
  • The largest tax increase in the country took place in Ohio, where a Republican governor and a Republican legislature voted to increase taxes by an astounding $3.4 billion
  • The second largest tax increase took place in New York, where Republican Gov. George Pataki signed a $3.2 billion tax increase into law.

As a result, electing Republicans provides no guarantee of fiscal rectitude at either the state or federal level. As a result, fiscal conservatives would do well to pursue different strategies. One idea might be to consider enacting constitutional barriers to tax increases such as supermajority tax limits.

Indeed, this summer, supermajority limits blocked tax increases. Eight of the nine states that enforced comprehensive supermajority limits balanced their budgets without raising taxes. The spending-cut-to-tax-increase ratio in these states was an astounding 137 to 1. Conversely, in the rest of the country, tax increases exceeded spending cuts.

While supermajority limits have worked well in the past, they face an uncertain future. In Nevada, Republican Gov. Kenny Guinn sued his state legislature for failing to pass a budget that would have increased taxes by more than $800 million. The Nevada Supreme Court responded by nullifying Nevada’s supermajority requirement. The long-term consequences of that decision remain to be seen.

An alternative strategy might be to prevent future fiscal shortfalls from happening in the first place. This could be done by enacting constitutional spending limits that include reserve funds. Such limits would minimize deficits by ensuring a low rate of government growth. Furthermore, during economic slowdowns, money from the reserve fund could be used to cover the shortfall.

However, perhaps voters in California have a better idea. This summer, California’s own supermajority limit prevented Gov. Gray Davis from enacting a tax increase. Like his counterpart in Nevada, Davis could have legally challenged his state’s supermajority limit. However, with his approval rating sinking and a recall election months away, Davis instead signed a budget that did not raise taxes.

Of course, not every state has a recall provision. However, as Thomas Jefferson said, “eternal vigilance is the price of liberty.” California’s experience this summer indicates that constitutional limits coupled with organized opposition may force the most strident supporter of tax increases to back down.

Michael New is an adjunct scholar with the Cato Institute and a post-doctoral fellow with the Harvard-MIT Data Center.