Once upon a time, Ed Rendell was mayor of Philadelphia. Fiscal conservatives feted him for slicing the city budget. He eliminated thousands of city jobs. He uprooted the cronyism that was long the hallmark of city government by instituting an aggressive competitive contracting system for the city. In his second term, he cut wage and business taxes, among the highest in the nation. Indeed, Rendell was a savior to city taxpayers hit with 19 tax hikes in a little more than 10 years. The Almanac of American Politics called his tenure as mayor a “bravura performance.”
How times have changed.
In the recent Cato Institute study, “A Fiscal Policy Report Card on America’s Governors: 2004,” Gov. Rendell receives an F. Based on his tenure between 2002 and 2004, he ranks as one of the worst new governors in the nation.
The Cato report card grades governors from a taxpayer’s perspective. Governors who cut taxes and spending the most received the highest grades. Those who increased spending and taxes the most receive the lowest grades. The grades are based on 15 objective variables based on data from the Census Bureau, National Association of State Budget Officers, and the budget offices of each governor.
Within two months of taking office, Rendell presented a budget that did not raise taxes and balanced the books with $1.6 billion in spending cuts. Then a few weeks later, he inexplicably announced: “I hate this budget.” He claimed he proposed it as a gimmick to show how painful it would be to close the budget gap without a tax increase. Those tax increases, he promised, were just around the bend.
The legislature, however, called his bluff and passed his no-tax-hike budget before Rendell had introduced his tax increases. This put him in the unique position of being one of the only governors in 2003 to have a legislature rubber-stamp his first budget proposal. Then Rendell vetoed his own budget.
Instead, Rendell decided to sock it to taxpayers. He pushed for a massive $2.8 billion tax hike, which boosted personal income taxes by 35 percent, and raised beer taxes and business taxes as well. The governor intended about half of the revenue generated to be devoted to lowering property taxes at the local level. But the total impact of the plan would have been to raise overall taxes on Pennsylvanians by $1.3 billion. All this to pay for a huge increase in the budget: an 8.6 percent growth in real per-capita expenditures, one of the largest annual increases in government spending in the nation in 2003.
Rendell was unrelenting in his support of the plan. Even when the federal government bailed out Pennsylvania with $900 million, Rendell didn’t back down from his tax hike. The state legislature fought the governor in a bruising year-long struggle. Ultimately, legislators relented and accepted a $1 billion tax hike, including a 10 percent income tax increase.
Many governors never learn the lesson that a state cannot tax its way back to prosperity. The experience of the 1990s proved that states that balanced their budgets by raising taxes had the hardest time clawing their way out of the last recession. In fact, the top 10 tax-hiking states had rates of growth in employment and personal income that were on average lower than the national average. The tax-cutting states saw economic growth faster than the national average.
The cause of the deep deficits of the last few years wasn’t a lack of taxpayer money - the problem was that governments spent too much taxpayer money. States that had the highest rates of government spending and tax growth in the 1990s also had the biggest deficits as a percentage of their general fund budgets. States that cut taxes and kept spending in check had smaller deficits.
Mayor Rendell understood that raising taxes was no formula for bringing back businesses and good-paying jobs. Gov. Rendell seemed to forget that over the last two years. On the other hand, this year he proposed a cut in the corporate income tax rate. That could be the first step toward recovery for this governor.