As the economy heads toward recession, the nation’s governors will need to decide how to close rising budget gaps. Some governors will decide to scale back spending to balance their budgets; others will push for tax increases.
These sorts of taxing and spending decisions are tallied in the Cato Institute’s latest fiscal “report card” on U.S. governors. Each state’s chief executive was assigned a grade from A to F based on the sanity of their fiscal policies in recent years.
Three governors earned an A for their efforts to restrain spending and cut taxes. Charlie Crist of Florida has trimmed the state budget and supported two large property-tax cuts since taking office last year. Mark Sanford of South Carolina cut income taxes and has pushed to impose a cap on state budget growth. Joe Manchin of West Virginia passed major business tax cuts, including repealing the franchise tax and cutting the corporate income-tax rate.
Bill Richardson of New Mexico, Jon Huntsman of Utah, and Dave Heineman of Nebraska also pursued pro-growth tax cuts, but their mediocre spending records dragged down their grades to a B. Other recipients of B grades — such as Tim Pawlenty of Minnesota — had good records on spending, but their support for substantial tax increases pulled their grades down.
Rick Perry of Texas and Mitch Daniels of Indiana also received Bs. They had good records on spending, but they passed large state-level tax hikes. Those hikes were swapped for local property tax cuts, but this sort of tax swap is bad policy because it centralizes fiscal power and reduces tax competition between local jurisdictions. The result in the long run will be bigger government and higher overall taxes.
Governors such as Arnold Schwarzenegger of California received a C. Like some other governors in the middle, Schwarzenegger has followed an erratic fiscal course — changing direction to suit the mood of the public and the legislature has changed. Schwarzenegger has resisted some tax increases, but he has proposed other large tax hikes himself. While he restrained spending in his first year, he signed off on big budget increases in others; California’s general fund budget jumped 27 percent between 2005 and 2007, for example.
At the bottom of the report card rankings, the F governors were not erratic — they consistently sought to increase taxes and spending. Illinois Gov. Rod Blagojevich, for example, proposed a massive $6 billion hike in gross-receipts taxes on businesses. Maryland’s Martin O’Malley enacted a sweeping $1.4 billion tax package that increased the corporate income tax rate, the top personal income tax rate, and the sales tax rate. The other six F governors — Ted Kulongoski of Oregon, Chet Culver of Iowa, Jon Corzine of New Jersey, Bob Riley of Alabama, Jodi Rell of Connecticut, and C. L. “Butch” Otter of Idaho — also proposed or enacted large tax hikes.
Aside from the poor performance of many governors, the report card reveals some disturbing fiscal policy trends. For one thing, there has been a dearth of pro-growth tax reforms in recent years. The vast majority of governors have favored special-interest tax breaks — such as tax credits for filmmakers and refundable tax credits for individuals — over income-tax rate cuts that benefit all citizens by spurring long-term economic growth.
Few governors seem to realize that the states are competing in the global economy for job-creating capital. Corporate tax rates have plunged around the world, but the average state corporate income tax rate is the same now as it was two decades ago. While a few governors, such as Democrat Joe Manchin, have cut business taxes, many others, such as Republican Rick Perry, have presided over large, job-killing tax increases on business.
Another disturbing trend is soaring state and local government debt, which has increased 83 percent this decade to over $2.2 trillion. At the same time, state pension and retiree health care plans are underfunded by more than $2 trillion, and that figure is rising. Hopefully, the governors will heed the Wall Street debacle and begin scaling down their costly borrowing binge.
With all the economic challenges facing families and businesses, America needs men and women in their statehouses who will restrain spending, pay down debt, and pursue tax-rate cuts that spur growth. The new governors who come into office after the election should look to the economically — and politically — successful approaches of Crist, Sanford, and Manchin.
– Chris Edwards is director of tax-policy studies at the Cato Institute and co-author of Global Tax Revolution.