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Bond Ratings
If tax cuts contribute to fiscal deterioration, then
the bond ratings of the 10 states that cut taxes the most in
the 1990s should be worse than those of the 10 states that
raised taxes. Just the opposite is true. In the tax-
cutting states, the average Moody's bond rating in 1995 was
between Aaa and Aa. In the tax-raising states, the average
Moody's bond rating was between Aa and A1.
Numerous academic studies on the competitive environ-
ment in the states have confirmed what the anecdotal evi-
dence above suggests. For instance, in a 1996 study, econo-
mist Zsolt Becsi at the Federal Reserve Bank in Atlanta
found that "relative marginal tax rates have a statistically
significant negative relationship with relative state
growth." He advises that "if [a state's] long-term growth
rates seem too low relative to other states, lowering aggre-
gate state and local marginal tax rates is l1ikely to have a
7
positive effect on long-term growth rates."
Or as Michi-
gan's Engler has put it, "The governors are now cutting
taxes because we have seen them work in our states first
hand."18
It appears that, for now at least, the supply-side phi-
losophy, that low tax rates help promote state economic com-
petitiveness, is9 the new governing doctrine in the nation's
1
state capitals.
The new tax-cutting philosophy has even
invaded some of the most traditionally liberal spending
states. Last year Democratic Governor Parris Glendening of
Maryland endorsed lowering tax rates by 10 percent, after
earlier conceding that "right now an income tax cut is the
single most important step we can t0ake to make Maryland more
2
competitive and create more jobs."
Purpose of the Fiscal Policy Report Card
This report focuses on the fiscal record of governors
for several reasons. One is that state governments have
evolved into large, multi-billion-dollar enterprises. The
budgets of some states--including California, Florida, New
York, and Texas--now exceed $50 billion, which means that
they are larger than most nations' budgets. In 1996 total
state spending was roughly $860 billion, up from about $685
billion in 1990 (in 1996 dollars) and about $490 billion in
1980 (in 1996 dollars). The states now spend roughly $3,250
per person and 14 percent of personal income. With such
huge resources under their control, in many ways governors
in the 1990s serve as the equivalent of the states' chief