Policy Analysis No. 343

The State Spending Spree of the 1990s

By Dean Stansel and Stephen Moore
May 13, 1999

Executive Summary

Today, almost without exception, state governments are awash in tax revenues. Between 1992 and 1998 state revenues grew at almost twice the rate of inflation plus population growth. If states had restricted increases in spending and tax collection to the rate of inflation and population growth over the period 1992-98, the state tax burden would be $75.2 billion lower today, or $278 less per person. In Michigan, the excess tax burden from 1992 to 1998 came to $787 per person; in New Mexico, $661; in Minnesota, $573; in Connecticut, $535; and in Wisconsin, $520.

In 1999 state tax receipts are again exceeding expectations. States will also begin to receive from tobacco litigation settlements an additional revenue bonus worth $206 billion over the next 25 years.

As record tax revenues have poured into state coffers, state government expenditures have soared. In an era of almost no inflation, state budgets grew by 4.5 percent in 1996, 5 percent in 1997, and nearly 6 percent in 1998. Four states (Vermont, Florida, Nevada, and South Dakota) actually raised their spending by 10 percent or more in 1998. The states now spend roughly $600 (adjusted for inflation) more per person than they did in 1990. Seven states have permitted their budgets to mushroom by more than 30 percent after adjusting for population growth and inflation: Mississippi, Oregon, Arkansas, West Virginia, Texas, Missouri, and New Hampshire.

Over the past four years, only about one of every three dollars of the unexpected revenue surpluses has been returned to taxpayers. Unless states begin to cap expenditure growth and cut taxes to reduce the revenue intake of state governments, they may be faced at the end of this expansion with the same massive deficits that created tidal waves of red ink when the 1980s boom ended.

One of Jesse Ventura’s most popular messages in his improbable but successful independent campaign for governor of Minnesota was a promise to “give back” the burgeoning budget surplus revenues to the taxpayers of the state. It is sad but revealing that so few of the governors of either party have promised to do the same despite multi-billion-dollar windfalls.

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Stephen Moore is director of fiscal policy studies at the Cato Institute. Dean Stansel is a fiscal policy analyst at Cato.