State governments got squeezed during the last recession as tax revenues fell. But since then budgets have rebounded, and general-fund revenues are up 33 percent since 2010. What are the states doing with the inflows of cash?
The Cato Institute's new "fiscal policy report card" finds out by looking at the tax and spending policies of each state governor. It assigns grades of "A" to "F" based on how frugal or spendthrift each leader has been. The best governors have restrained spending and pursued tax cuts, while the worst have grown their budgets rapidly and pushed tax hikes.
We awarded an "A" to five governors:
Paul LePage of Maine has held the line on spending and cut government employment 9 percent. Maine has enacted two rounds of income-tax reforms during this tenure.
Pat McCrory of North Carolina also approved major tax reforms. He replaced a three-bracket individual income tax with a lower-rate flat tax. He also chopped the corporate-tax rate.
Rick Scott of Florida wants to make his state the best for business — and he is making progress. He raised the exemption level for the corporate tax, cut vehicle fees, cut taxes on communication services, and eliminated sales taxes on manufacturing equipment.
Doug Ducey of Arizona has overseen lean budgets and made major pension reforms. He ended sales taxes on some business purchases, reduced insurance-premium taxes, increased depreciation deductions, and indexed income-tax brackets for inflation.
Mike Pence of Indiana has been a champion tax cutter. He cut the individual income-tax rate by 5 percent, cut property taxes on business equipment, and repealed Indiana's inheritance tax. He also slashed the corporate-tax rate.
All the "A" governors are Republicans. The data show that Republican governors are more fiscally conservative, on average, than Democrats. Budget growth is a little slower under Republican governors, and they are more likely to pursue major tax cuts.
One exception on the tax side is Democrat Andrew Cuomo of New York, who received a "B." He cut corporate income-tax rates, simplified the corporate-tax base, increased the estate-tax exemption, and ended a surcharge on utility customers. In a 2016 compromise with state Republicans, he approved substantial income-tax cuts for middle-income households, which will be phased in over time.
But many Democratic governors were clustered near the bottom of Cato's report, including seven out of the ten "F" grades. The worst-scoring governor, Democrat Tom Wolf of Pennsylvania, has only been in office since 2015, but he's already pushed for higher income taxes, higher sales taxes, higher tobacco taxes, a new severance tax on natural gas, and other hikes.
Nonetheless, it was a Republican — Brian Sandoval of Nevada — who signed into law the largest recent tax hike of any state, measured relative to a state's tax revenues. Sandoval came into office promising to oppose tax increases, but his 2015 hike was the biggest in Nevada's history. He increased cigarette taxes, sales taxes, business license fees, and the Modified Business Tax.
Sandoval also imposed a new business tax to fund education, the Commerce Tax, which is complex and economically harmful. Yet just the prior year, Nevada voters had rejected by a 79-21 margin a new business tax to fund education.
Other notable tax-hikers are the three "left coast" Democrats, Jerry Brown of California, Kate Brown of Oregon, and Jay Inslee of Washington. All received "F" grades for supporting large tax hikes and presiding over rapid budget growth. Over the past three years, California's general-fund budget has soared 22 percent.
These governors may be enjoying inflated budgets now, but when the next recession hits they will face a budget squeeze as the new spending becomes unaffordable. California's budget is particularly susceptible to recessions because state revenues are highly dependent on the volatile incomes of the wealthy — the top 1 percent of earners pays almost half of the state's income taxes. If that money dries up, Jerry's Brown $68 billion high-speed-rail scheme will look like an even bigger boondoggle than it already is.
A possible recession is not the only storm cloud for state budgets. The states face rising health-care costs, and many states have large unfunded liabilities in their retirement plans. Liberals might think that these problems can be solved by more tax increases, but in today's competitive economy businesses and skilled workers are footloose, so tax hikes will shrink the tax base and reduce economic growth.
Look at Connecticut, which has suffered weak growth under the high taxes of "F" Governor Dan Malloy. General Electric essentially rebuked Malloy's policies earlier this year when it moved its headquarters out of the state. GE head Jeff Immelt had warned that his company needed "a more pro-business environment."
We need more pro-business and pro-taxpayer environments in every state, and Cato's "A" governors are leading the way on reforms.