Do Tax Cuts Work? Just Look at the States

Can pro-growth tax cuts pump steroids into our sagging national economy? Just look at the experiences of the states, many of which have been on a supply-side tax-cutting binge. Last year was the sixth straight year that the states, in aggregate, cut taxes. Over the course of the 1990s, 26 governors approved cuts in state income tax rates and 14 more slashed corporate tax rates.

The governors are proving that tax cuts can be a highly effective economic stimulant. Our research indicates that over the past decade, the 10 states that cut taxes the most created about twice as many new jobs and enjoyed about 27% more income growth than the 10 states that raised taxes the most.

Consider Michigan. When John Engler became governor in 1991, the state’s manufacturing economy was in the tank and the Michigan unemployment rate was the second highest in the nation. A few months ago Mr. Engler signed into law his 30th and 31st tax cuts, for a cumulative taxpayer savings of some $20 billion. The result: Michigan has had 10 years of unprecedented prosperity, even ranking third among the states in job growth.

So which governors have successfully followed this prosperity model? Which have moved their states in an anticompetitive direction? The answers are in the latest Cato Institute biennial Fiscal Report Card of the Governors. Those governors who have cut taxes and restrained state spending the most receive the highest grades; those who have raised both taxes and state government expenditures receive the lowest grades. We use an objective measuring standard and rely on official statistics from the Census Bureau’s survey of state finances, as well as National Association of State Budget Officers statistics.

The nearby table shows the results. The two champion tax-cutting governors today are Paul Cellucci of Massachusetts and Kenny Guinn of Nevada. Former Texas Gov. George W. Bush receives a B grade and impressively ranks third among the 48 graded. The three most fiscally reckless governors are John Kitzhaber of Oregon, Gray Davis of California and Tom Vilsack of Iowa.

Here also is a brief summary of the fiscal performances of some of the more prominent American governors:

Minnesota’s Jesse “The Body” Ventura, the former pro-wrestler, is arguably the most colorful figure in American politics today. Mr. Ventura won a three-way race for governor in 1998 by arguing that the state’s $2 billion surplus “belongs to the people.” The people agreed. Over the past three years he has sent $2.5 billion in tax cuts and rebate payments back to workers. The average Minnesota family has received more than $750 in rebate checks. Mr. Ventura’s political success has proven that tax-cutting still has broad populist appeal in America.

Then we have California’s Gray Davis. The energy crisis isn’t the only economic problem aggravated by his ineptitude. When he won office in 1998, he pledged to “govern from the center.” Instead, he’s been one of the biggest spenders in the nation. The California budget has soared to $99 billion from $75 billion in Mr. Davis’s first two years. That doesn’t count the money he now wants the state to spend buying up electric power so that it can turn around and sell it to Californians at a deep discount. In his state, three-fourths of surplus tax dollars have gone to fattening the budget.

Florida’s Jeb Bush promised tax cuts, voter approval of tax increases, school choice and inner-city redevelopment. He’s delivered in an impressive fashion. In his first year he signed into law a $1 billion property tax cut; his second budget contained another $500 million in tax relief. His signature achievement was a pioneering school-voucher experiment. The program has received national attention because Florida is the first state to give scholarships to students in low-performing public schools so that they can attend certified private schools. The plan was signed into law in 1999 and withstood a Florida Supreme Court challenge in 2000. It’s already helping thousands of kids by forcing the public schools to raise their academic standards. No wonder Jeb is many people’s favorite Bush.

Massachusetts’s Paul Celucci is on a one-man mission to destroy this state’s derisive nickname of “Taxachusetts.” Mr. Celucci has fought with pit-bull determination for a $1 billion tax cut, the largest in his state’s history. He proposed lowering the income tax rate to 5% from 6%, cutting the state capital gains tax in half, and cutting unemployment taxes. The overwhelmingly Democratic legislature said no. So last year, Mr. Celucci took his tax cut right to the voters by spearheading a ballot initiative. Despite universal special-interest opposition, the Celucci tax cut passed with 60% support. Mr. Celucci also gets high marks for opposing Internet taxation, a position he says “hasn’t won me friends with some of my fellow governors.”

Finally, there is the question of the fiscal record of George W. Bush while he was Texas governor. Mr. Bush racked up a decent, but not a dazzling, pro-taxpayer record. He came into office promising tax cuts, tort reform, a lighter regulatory burden for business, and stringent education standards. Mr. Bush delivered on each of those promises, more or less. He signed two of the largest tax cuts in Texas history. But Mr. Bush could leave conservatives frustrated. This is a politician who seems to always want to please everyone. As the Austin Statesman wrote of Mr. Bush’s final budget: “He took a $6 billion surplus, cut taxes by $1.5 billion and spent most of the rest.” Still, the latest comptroller report indicates that Texas still has a $1 billion-plus budget surplus.

For six years Mr. Bush gave Texans tax cuts and balanced budgets. If he can accomplish that trick in Washington, we could be in for an era of unprecedented prosperity.

Stephen Moore is a senior fellow at the Cato Institute. Stephen Slivinski is a fiscal policy analyst at Cato.