The states are now mired in their worst fiscal crisis in at least a decade. The combined total of red ink in California, Florida, and New York alone could eclipse $40 billion in 2003. New York Gov. George Pataki recently moaned that "we are not facing a rainy day in New York. We are facing a monsoon." That depressing scenario could apply to three-quarters of the debt-deluged states.
Outspending Bill Clinton
Most governors have complained that the financial troubles are a result of factors beyond their control: the recession, the stock market slump, new spending requirements as a result of terrorism, and exploding health-care costs. In truth, the primary culprit has been the profligacy of the nation's governors themselves. In the past 12 years state budgets have increased by more in dollar terms ($240 billion) than they did in the previous 100 years. State spending in the late 1990s grew twice as fast as the federal budget did: The governors somehow managed to outspend Bill Clinton.
Having refused to deal with their money problems by trimming bloated budgets, many governors are instead threatening major tax hikes for next year to replenish state treasuries. If that happens, 2003 could be the biggest year for state tax increases ever.
Will the states ever learn from their mistakes? In the 1990-91 recession, many governors -- including Jim Florio of New Jersey, Pete Wilson of California, and Lowell Weicker of Connecticut -- tried to balance their budgets by enacting steep tax hikes on the rich, only to plunge their states into deeper fiscal holes. Meanwhile, many reformist governors -- such as Michigan's John Engler, Arizona's Fife Symington, and New Jersey's Christine Todd Whitman -- cut tax rates during the downturn. The strategy worked: The local economies improved and these states generated more revenues when taxes were being cut than when their predecessors raised taxes.
It is in the context of the current state fiscal crisis that we release the results of our sixth biennial fiscal report card on the governors. Governors that have cut taxes and spending the most receive the highest grades. Those that have raised taxes and spending the most get the worst grades. The top three scores this year were earned by Republicans Bill Owens of Colorado and Jeb Bush of Florida and Democrat Roy Barnes of Georgia. F grades were assigned to the four most fiscally reckless governors: Don Sundquist of Tennessee, Gray Davis of California, Bob Taft of Ohio, and John Kitzhaber of Oregon.
Here are the grades of some of the governors of some of the biggest states: George Pataki of New York, B; George Ryan of Illinois, D; John Engler of Michigan, B; Jane Hull of Arizona, D; and Jim Hodges of South Carolina, D.
Gray Davis of California has recorded one of worst financial performances of any governor in any state in a very long time. In his four years in office, the California budget has mushroomed from $74 billion to $101 billion. He inherited a $10 billion budget surplus; now the state faces a two-year $24 billion deficit -- the largest ocean of red ink in the history of the states. The state payroll swelled by 25,000 employees during Davis's first three years in office, a larger increase than the next three biggest states combined. Moody's has downgraded California bond ratings twice already. It may take years for the state to dig out of this fiscal ditch.
Bill Owens of Colorado, by contrast, was recently praised by National Review as "America's best governor." He is also one of the most fiscally tight-fisted. Thanks to a model state spending limitation measure, Mr. Owens has provided tax rebates to Colorado citizens four years in a row, saving the average Colorado family $1,500. He also cut the income tax rate from 5% to 4.75%; slashed the taxes on capital gains, interest, and dividends; and businesses have received property tax relief. Colorado's economy has flourished.
Jeb Bush of Florida is the real tax-cutting fiscal conservative in the family. In a state with no income tax, Gov. Bush has cut the Florida property tax by $1 billion, and in 2001 he cut the business intangible tax by another $600 million. Earlier this year he took the unusual step of walking the halls of the Capitol himself asking members of both parties to oppose a sales tax hike sponsored by members of his own party. Mr. Bush has also distinguished himself by promoting one of the most innovative choice-based school reforms in the nation -- a plan that allows students in failing schools to go to any public or private school of their choice -- and by enacting tort reform legislation fiercely opposed by the trial lawyers.
Roy Barnes of Georgia may be the pre-eminent tax-cutting Democrat on the national scene. In his first year in office he pushed a Taxpayer Bill of Rights that has saved Georgia homeowners $350 million so far. He has also cut the unemployment insurance tax in Georgia, resulting in tax relief of over $1 billion to businesses and workers. He now wants to cut the state capital gains tax. When the recession hit, Mr. Barnes imposed a freeze on state hiring and made across-the-board cuts of 2.5% in the 2002 budget and 5% in the 2003 budget. No wonder Gov. Barnes is considered a potential presidential contender.
George Pataki of New York was elected in 1994 to bring fiscal sanity and return economic prosperity to the nation's most taxpayer-hostile state (taxes are 40% above the national average). In his first term he arrested New York's downward spiral by cutting income taxes 25%, keeping spending to below the rate of inflation, and chopping the highest-in-the-nation inheritance tax. He converted $5 billion of red ink into a record $2 billion surplus.
Alas, the policies of Mr. Pataki's second term have been closer to former-New York Gov. Nelson Rockefeller than those of Ronald Reagan. Fiscal '98 and fiscal '99 budgets grew five times as fast as his first-term budgets. He enraged taxpayer groups by agreeing to a $2 billion taxpayer giveaway to one of the largest unions in the state, in exchange for its endorsement. New York is a more tax-payer friendly state now than when Mr. Pataki first arrived, but the budget in Albany is still one of the most bloated in the nation.
A Lesson for Governors
The lesson of the 1990s is that governors can't tax their way back to prosperity. An analysis by the American Legislative Exchange Council of state tax policy during the past decade found that the 10 states that cut taxes the most created twice as many new jobs as the 10 states that raised their taxes the most. In investment terms, it's always wise to short states that are raising tax rates.
That's a lesson that the governors -- of both parties -- ignore at their own peril.