There’s is a lot of propaganda spreading about states’ fiscal plights that needs to be dispelled — now. If you believe what the National Governors Association (NGA) and many national news outlets are saying, President Bush’s tax cuts have slashed revenues in all 50 states, cut spending to the bone, and forced most legislatures to raise taxes to balance their budgets. But the depth of the spending cuts is dubious. Few states have passed broad-based income tax increases, and Bush’s tax cuts have not only helped offset those state tax and fee hikes that have been passed, but will stimulate economic growth to help boost state and municipal operating revenues, according to independent budget analysts in Washington, D.C. Perhaps the most specious claim of all — pushed by the NGA’s left-of-center staff — is the level that state spending has been reduced to. Yes, state and municipal governments have had to tighten their belts in the last three years of the economic slump. But the Fiscal Survey of States released last month by the NGA shows that tax revenues are actually expected to rise, according to budget analysts who have studied the NGA’s latest data. State revenues, which totaled nearly $470 billion in fiscal 2003, are expected to rise to $482 billion in the current 2004 fiscal year, “a 2.6 percent increase,” says Chris Edwards, director of fiscal policy for the Cato Institute, a free-market think tank. “Some states are cutting spending, but NGA data shows that for the 49 states other than California (which will have to cut spending deeply to erase a monstrous $38 billion deficit), spending will still rise in the aggregate by more than 2 percent in the coming fiscal year,” Edwards says. Hardly the dire fiscal picture many newspapers and network news shows are drawing. The Washington Post, for example, reported that “budget cuts and layoffs this year produced the deepest state spending reductions in dollar terms since the governors began their fiscal survey.” The NGA has also been feeding into this skewed depiction: “Governors in 29 states recommended tax and fee increases in fiscal 2004,” the NGA cited in its latest fiscal report. “Further, state spending growth … is expected to decline 0.1 percent in fiscal 2004.” That’s not how non-NGA budget analysts interpret the data. According to them, most of the governors were not raising major, broad-based taxes on income, retail sales or property. Instead, most have looked to “sin taxes” on alcohol, tobacco, gambling and a broad range of higher fees for state services. With the exception of the two mega-states, California and New York — which account for nearly 20 percent of the population — “the rest of the picture isn’t so bad,” says budget analyst Stephen Moore at the Club for Growth, a conservative action committee. “Actually, the governors on balance have done a very good job of dealing with this budget mess. “Only about 12 states have raised major taxes this year on incomes, retail sales or property,” Moore says. “That’s not many” in light of the fiscal pressures they are under. I think the reason so many governors have rejected major tax hikes is that they recognize that higher taxes will only hurt their economies and future revenue growth. For example, Republican Gov. Jeb Bush of Florida has cut taxes, as has Democratic Gov. Bill Richardson of New Mexico. Illinois Gov. Jennifer Granholm, a rising Democratic star, also turned down major tax increases, instead calling for higher state fees and a tax on diesel fuel. In Minnesota, Republican Gov. Tim Pawlenty kept his campaign pledge against higher taxes by raising fees and slowing spending. What do I see as the real cause of the budget shortfalls? Unrestrained spending during the high-growth 1990s, when the money was rolling into state coffers and lawmakers were spending it like there was no tomorrow. Unfortunately, tomorrow came faster than they expected. “I have not seen a lot of spending cuts around the country,” says Brian Riedl, the Heritage Foundation’s budget analyst. “I’ve seen budget gimmicks such as borrowing from state pension funds. “Since 1990, state spending has grown by 50 percent, adjusting for inflation. State spending grew at nearly twice the rate of federal spending,” Reidl says. In California’s case, tax revenues have risen by 28 percent since 1999, but spending has gone up 36 percent “and that turned a $10 billion surplus into a $38 billion deficit,” Riedl says. There’s a lesson in all this that many business leaders understand, but too many politicians never learn: Be frugal during the strong economies, so you’ll have enough money to tide you over when the economy weakens.
The National Governors Association and much of the national media want to blame the Bush tax relief for the current fiscal state of affairs in many states instead of the real cause: out of control spending.