States Face Fiscal Crunch after 1990s Spending Surge

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Across the nation, large budget gaps are forcingstate governments to make tough policychoices. While some states are trying to controlspending, others are turning to tax increases tobalance their budgets. Some state officials aretrying to pass the buck for their poor fiscal managementby pleading for a bailout fromWashington. But a bailout would encouragestates to continue overspending, which is thesource of the current fiscal mess.

The states’ mistake was to allow rapid tax revenuegrowth during the 1990s to fuel an unsustainableexpansion in spending. Between fiscalyears 1990 and 2001, state tax revenue grew 86percent–more than the 55 percent of inflationplus population growth. If states had limitedspending growth to that benchmark, budgetswould have been $93 billion smaller by FY01–representing savings roughly twice the size oftoday’s state budget gaps. If revenue growthhigher than the benchmark had been given backto taxpayers in permanent tax cuts and annualrebates, rebates could have been temporarilysuspended during FY02 and FY03 to provide acushion with which to balance state budgets.

Current budget gaps provide policymakersan opportunity to weed out the budget excessesbuilt up during the past decade. Yet overall statespending continues to grow. After soaring 8.0percent in FY01, state general fund spendinghas not been cut in FY02 or FY03 even as largebudget gaps have appeared.

States should impose tax and spending growthcaps to prevent budgets from growing too quicklyduring the next boom. Revenue growth above abenchmark would be given back in tax cuts and taxrebates. That would prevent spending from increasingtoo quickly and provide the option of suspendingrebates during slowdowns to close budget gapswithout the damage caused by tax rate increases.

Chris Edwards, Stephen Moore, and Phil Kerpen

Chris Edwards is director of fiscal policy studies at the Cato Institute. Stephen Moore is a senior fellow at the Cato Institute and president of the Club for Growth. Phil Kerpen is a policy analyst at the Club for Growth.