Do Tax Cuts Work? Just Look at the States

This article originally appeared in the Wall Street Journal on February 12, 2001.
Share

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 asupply-side tax-cutting binge. Last year was the sixth straight year thatthe states, in aggregate, cut taxes. Over the course of the 1990s, 26governors approved cuts in state income tax rates and 14 more slashedcorporate tax rates.

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

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

So which governors have successfully followed this prosperity model? Whichhave moved their states in an anticompetitive direction? The answers are inthe latest Cato Institute biennial Fiscal Report Card of the Governors.Those governors who have cut taxes and restrained state spending the mostreceive the highest grades; those who have raised both taxes and stategovernment expenditures receive the lowest grades. We use an objectivemeasuring standard and rely on official statistics from the Census Bureau'ssurvey of state finances, as well as National Association of State BudgetOfficers statistics.

The nearby table shows the results. The two champion tax-cutting governorstoday are Paul Cellucci of Massachusetts and Kenny Guinn of Nevada. FormerTexas Gov. George W. Bush receives a B grade and impressively ranks thirdamong the 48 graded. The three most fiscally reckless governors are JohnKitzhaber 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 moreprominent American governors:

Minnesota's Jesse "The Body" Ventura, the former pro-wrestler, is arguablythe most colorful figure in American politics today. Mr. Ventura won athree-way race for governor in 1998 by arguing that the state's $2 billionsurplus "belongs to the people." The people agreed. Over the past threeyears he has sent $2.5 billion in tax cuts and rebate payments back toworkers. The average Minnesota family has received more than $750 in rebatechecks. Mr. Ventura's political success has proven that tax-cutting stillhas broad populist appeal in America.

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

Florida's Jeb Bush promised tax cuts, voter approval of tax increases,school choice and inner-city redevelopment. He's delivered in an impressivefashion. In his first year he signed into law a $1 billion property tax cut;his second budget contained another $500 million in tax relief. Hissignature achievement was a pioneering school-voucher experiment. Theprogram has received national attention because Florida is the first stateto give scholarships to students in low-performing public schools so thatthey can attend certified private schools. The plan was signed into law in1999 and withstood a Florida Supreme Court challenge in 2000. It's alreadyhelping thousands of kids by forcing the public schools to raise theiracademic standards. No wonder Jeb is many people's favorite Bush.

Massachusetts's Paul Celucci is on a one-man mission to destroy this state'sderisive nickname of "Taxachusetts." Mr. Celucci has fought with pit-bulldetermination 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 statecapital gains tax in half, and cutting unemployment taxes. Theoverwhelmingly Democratic legislature said no. So last year, Mr. Celuccitook his tax cut right to the voters by spearheading a ballot initiative.Despite universal special-interest opposition, the Celucci tax cut passedwith 60% support. Mr. Celucci also gets high marks for opposing Internettaxation, a position he says "hasn't won me friends with some of my fellowgovernors."

Finally, there is the question of the fiscal record of George W. Bush whilehe 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, alighter regulatory burden for business, and stringent education standards.Mr. Bush delivered on each of those promises, more or less. He signed two ofthe largest tax cuts in Texas history. But Mr. Bush could leaveconservatives frustrated. This is a politician who seems to always want toplease 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 ofthe rest." Still, the latest comptroller report indicates that Texas stillhas a $1 billion-plus budget surplus.

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