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Thirteen states

the people. For example, in 1997 Colorado

had reached separate agreements worth $40

rebated $142 million in tax revenues to tax-

billion. State coffers will soon start to see the

have adopted

payers, while Missouri gave back $318 mil-

impact of this huge settlement, with total

measures requir-

lion in rebate tax credits.40

annual payments starting at $4.5 billion and

ing that any tax

As the data in Table 8 (discussed earlier)

rising to $9 billion.

indicated, the per capita savings on taxes

At least six states have already decided to

increase by the

would have been $278 this year if every state

spend this windfall on things such as chil-

legislature must

had implemented a population plus infla-

dren's programs and nursing homes, having

tion tax cap prior to the current expansion.

approved legislation even before the settle-

pass by a super-

ment was final.44 That is the wrong approach.

majority vote in

Cut Anti-Growth Income and Corporate

Ultimately, the tobacco settlement payments

both houses.

Tax Rates First

will be borne by consumers in the form of

Most of the economic evidence indicates

higher prices. Thus, the windfall to state trea-

that not all tax cuts are the same. States with

suries should be rebated to all state taxpayers

no or flat-rate income taxes have outper-

or returned to smokers via a reduction in

formed their neighbors in terms of job

tobacco taxes.

growth, population growth, and income

gains. The real personal income growth in

Conclusion

states with no or low income taxes was 223

percent between 1962 and 1994, but it was

only 175 percent in states with high income

Gov. Jesse Ventura's improbable victory in

tax rates.41 The first priority of states in cut-

November was propelled in part by his

promise to pass back surpluses to taxpayers.

ting taxes should be to reduce excessive per-

Few others have followed his lead. Republi-

sonal and corporate income tax rates.

can governors have boasted of their tax cut-

Supermajority Vote Requirement to Raise

ting, but those tax cuts have in almost all

Taxes

cases been insufficient to return to taxpayers

the excess money that states have garnered

Thirteen states, including Arizona,

from the economic expansion. Nationwide,

California, and Nevada, have adopted mea-

only one-third of the surplus money has been

sures requiring that any tax increase by the

dedicated to tax cuts. State legislators have

legislature must pass by a supermajority vote

irresponsibly treated the excess tax collec-

in both houses. Most require a two-thirds

tions as if they were lottery winnings.

vote, but others require three-fourths or

The states should restrain spending and

three-fifths. Those measures have been high-

pass back revenue surpluses to the American

ly effective at deterring routine tax increases

workers and businesses who created them in

during nonemergencies.42  Supermajority

the first place.

requirements are most effective when they

are applied to all tax increases--whether in

income taxes, business taxes, sales taxes, or

Notes

excise taxes.

1. National Association of State Budget Officers,

Pass Tobacco Settlement Funds Back to

"Tax Outlook for Fiscal 1999," Washington,

February 1998 and May 1998.

Taxpayers

Last November 46 states reached an agree-

2. National Governors' Association and National

ment with the tobacco industry on a $206

Association of State Budget Officers, The Fiscal

billion settlement of their suit over the med-

Survey of States, December 1998.

ical treatment costs of smoking-related

3. Stephen Moore, "State Spending Splurge: The

illnesses.43 Previously, four other states--

Real Story behind the Fiscal Crisis in State

Florida, Minnesota, Mississippi, and Texas--

Government," Cato Institute Policy Analysis no.

25