Today, state balance sheets are looking better. The U.S. Census Bureau reported in April that total state tax revenue for 2004 was up 8.1 percent. Recent reports estimate that aggregate state tax collections for the first quarter of 2005 were up 11.7 percent, the strongest year-over-year growth since 1991.
Governors tout these new developments as good news. Yet, if history is any guide, that’s good news for politicians but bad news for taxpayers. When unanticipated tax money flows into state capitals, it will often be spent on more government programs.
It’s instructive to remember how we got here, and what exactly the governors mean when they refer to the “fiscal crisis” of the past few years. Less than five years ago, states had the largest surpluses on record. But by fiscal 2002, the weak U.S. economy had led to slower tax growth in states, and historic surpluses quickly turned into monumental deficits. Many of these deficits were the largest in state history.
What caused the deficits? Many governors are loathe to admit that the shortfalls would have been much smaller if politicians in state capitals had simply restrained their big-spending tendencies. Instead, they committed their states to an ever-expanding array of spending programs during the 1990s. True, some governors also cut taxes. But, on average, for every three new tax dollars received by the states during the 1990s, only one dollar went to tax cuts. The remaining two went to new spending.
Take Medicaid, the state-run program that pays medical bills for the poor. It’s the fastest-growing government program in most states, but not because more people are necessarily in need of it. State governments were expanding the number of people who could enroll in the program. According to the Congressional Budget Office, nonelderly Medicaid enrollment stayed relatively constant throughout the 1980s. But from 1990 to 2002, it more than doubled. State policymakers were practically guaranteeing their states would crash into a sea of red ink once the U.S. economy stalled. Historic increases in the budgets for all sorts of other programs were also a common occurrence during the economic boom of the 1990s.
During the recession, when governors were clamoring for a federal bailout, most state budgets did not actually shrink in absolute size. The rate of budget growth simply declined. According to the National Association of State Budget Officers, in the final fiscal year of the economic doldrums — fiscal year 2003 — state general fund budgets were a total of 10 percent bigger than they were in fiscal 2000, the year before the fiscal slump began. From the perspective of many governors and state legislators, the real “crisis” in the state capitals was not that politicians had to cut substantial amounts of spending. It was that the politicians were not able to spend as much as they would have liked.
Some say states need to spend more after a recession to bring their budgets up to where they would have been in the absence of a recession. But the temporary time-out on spending is more accurately seen as a needed course-correction. It forced states to prioritize programs and make the hard decisions they didn’t have to make in a time of plenty. It was a scaling-back of previously overcommitted governments, not a case of already efficient and small governments being cut to the bone.
Governors have been tested in this downturn, but a harder test is on the horizon. How governors handle the new surpluses will show their true colors. It will show whether they are committed to richer government or richer taxpayers. Some governors will find ways of cutting waste in government and returning surplus tax money to taxpayers. Others will surf the tide of taxpayer money rushing into state coffers. Often, the mark of good leadership is saying no at a time when it’s much easier to say yes.