Figure 2
State and Local taxes as a Percentage of Median Family Income, 195597
(two-income family)
16%
12%
8%
4%
0%
1955
1965
1975
1985
1995
1997
Source::TTxaFxuFdouondation.
Source a o n ati n.
growth and inflation--which are considered a
almost doubled over the past four decades.
standard benchmark for normal revenue
Many of the areas of state budgets that are
growth. From 1992 to 1998 state tax revenue
said to be "underfunded" have actually seen
Tax reductions
grew by 45 percent, while population and
dramatic increases over the past decade or
have been
inflation rose by a combined 22 percent
more. Since 1970 state spending on educa-
inadequate to
(Figure 3). In 1998 alone, those excessive tax
tion per student adjusted for inflation has
collections created a revenue windfall of $75
roughly doubled. Since 1980 state highway
keep pace with the
billion, or $278 per capita (Figure 4).5 With 31
spending has also risen faster than popula-
huge revenue
tion and inflation. State health and welfare
states now having Republican governors, most
spending has risen three times faster than
of whom tout themselves as tax-cutting fiscal
windfalls from the
population and inflation. Surplus or not,
conservatives, the results of our analysis are
strong economic
there's no case for expanding state govern-
surprising. Since large budget surpluses are
expansion of the
ment still further.
expected again in 1999 and 2000, this year's
While many Republican governors have
budgets signed into law by the governors will
past six years.
been cutting taxes, those tax reductions have
be critical in determining the future fiscal
been inadequate to keep pace with the huge
course of the states. The choice facing George
revenue windfalls from the strong economic
W. Bush of Texas, Gray Davis of California,
expansion of the past six years. Since 1994,
John Engler of Michigan, Tommy Thompson
despite $15 billion in tax cuts, state tax col-
of Wisconsin, and most other governors this
lections have exceeded expectations by a
year is to dramatically cut taxes or to continue
cumulative $30 billion. About two-thirds of
the spending spree on new and expanded state
that revenue windfall were spent, rather than
programs. This study shows that the states
rebated to taxpayers.
that use surpluses to cut high tax rates can be
The result has been that state tax reven-
expected to experience the fastest economic
ues have dramatically outpaced population
growth in the future.
3