It is for this reason that every two years I prepare a fiscal-policy report card on the nation’s governors for the Cato Institute. It is a report card that measures the performance of governors based on the criteria of promoting economic growth and controlling state-government spending and taxes. Typical rankings give the highest ratings to those governors who expand government the most. This takes the opposite approach: Those who keep government on a tight leash get the best grades.
So take a moment and scan the table below to discover how your governor fared this year. (Governors Bob Holden of Missouri, James McGreevey of New Jersey, Mike Easley of North Carolina, Mark Schweiker of Pennsylvania, Rick Perry of Texas, Mark Warner of Virginia, and Scott McCallum of Wisconsin all assumed office too recently to fully assess their records.)
The highest-rated governor this year is Bill Owens of Colorado.National Review recently touted Owens as America’s “best governor,” and this report confirms the accolade. The other A grade went to Jeb Bush, who is proving that he’s the biggest tax cutter in the family. The highest-rated Democrat this year was Roy Barnes of Georgia, an old-fashioned, fiscally conscientious southerner in the vein of his predecessor Zell Miller.
Oh, and as you can see, there were four Fs awarded this year for fiscal incompetence. They went to Don Sundquist of Tennessee, Gray Davis of California, Bob Taft of Ohio, and John Kitzhaber of Oregon. Sundquist and Taft are allegedly Republicans.
There are several trends in this study worth commenting on.
First, the state fiscal crisis that governors are now confronting has been a result of excessive spending, not insufficient tax receipts. In the decade of the 1990s state expenditures soared by $176 billion. Between 1996 and 2000, for example, state spending grew at roughly twice the rate of federal spending. The governors managed to make Bill Clinton seem like a penny pincher. Governor Owens said it best: “The states don’t have a revenue problem, they have a spending problem.” Gary Johnson, the combative governor of New Mexico, has remarked that “in the 1990s many governors believed that government was the solution to every problem.”
Second, many governors are foolishly trying to rebalance their budgets by raising taxes. The American Legislative Exchange Council (ALEC) finds that at least half the states raised taxes in 2001 and 2002 to the tune of $15 billion. As many as 30 states are expected to consider major tax hikes in 2003. Leading the pack are California and New York, which have a combined $30 billion potential deficit next year. If history is any guide, the states that raise taxes will be the states that remain mired in recession as the higher taxes continue to depress economic activity inside their borders.
Third, Republican governors have been a disappointment of late. Three of the biggest tax increases this past year were signed into law by Republican governors: Bob Taft of Ohio, Bill Graves of Kansas, and Don Sundquist of Tennessee. The good news from 2002 was that attempts to implement first-ever income taxes in New Hampshire and Tennessee were foiled. An attempt to pass a multi-billion-dollar expansion of the sales tax in Florida was also thwarted. Just because a politician has an R next to his name doesn’t make him a tax cutter.
Fourth, it appears that few governors learned the fiscal lessons of the previous recession of the early 1990s. During that recession, about half the states — led by Arizona, California, Connecticut, New Jersey, and New York — tried to close yawning budget gaps by enacting major tax hikes. Most of those tax-hiking states had the most persistent budget woes and the slowest economic recoveries.
In fact, the states that cut income taxes in the 1990s had double the population growth, nearly three times the job growth, and about 25% faster income growth than the states that raised tax rates. For those governors who believe that tax hikes can rescue a state from decline, I would love to introduce them to Jim Florio of New Jersey, whose soak-the-rich tax increases in the early 1990s sunk the Garden State’s economy in a swamp of financial malaise for years.
The fiscal-policy experience of the 1990s proves that taxes don’t just matter at the state level, they matter a lot. As governors combat combined budget deficits of as much as $40 billion next year, they must learn that tax hikes will balance budgets today about as well as blood letting promoted good health in the Middle Ages.
States can’t possibly tax their way back to prosperity. Hopefully, the governors will be smart enough not to try to.
