The Magazine

Republicans Who Love Taxes

Coming soon to a state house near you.

Feb 17, 2003, Vol. 8, No. 22 • By STEPHEN MOORE
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NOT SINCE RECONSTRUCTION had a Republican won a governor's race in Georgia--until last November, when Sonny Perdue pulled off a stunning come-from-behind victory over incumbent Democrat Roy Barnes. But after 120 years of Republican exile from the governor's mansion, it took Gov. Perdue only about 120 minutes to endorse Georgia's largest tax increase in memory: $600 million. Tax collections in Atlanta have nearly doubled in the last 12 years, making preposterous Perdue's claim that either "taxes must be raised or vital services cut." Perdue has now retreated from the tax-hike blunder, but only after anti-tax Republicans in the state legislature persuaded him that the votes couldn't be found for his tax grab.

Perdue isn't the only GOP governor flirting with higher taxes. An analysis by the American Legislative Exchange Council (ALEC) notes that with nearly $100 billion in state deficit spending gaps to close this year (New York and California make up about half that shortfall), governors may end up raising taxes by half that amount, making 2003 the biggest tax-hike year ever for the states. And yes, many of the calls for the biggest tax increases are coming from Republicans. In Idaho, Gov. Dirk Kempthorne is seeking a 1.5 cent per dollar hike in the sales tax. In Arkansas, Mike Huckabee is lobbying for a sales tax hike and assorted other fee increases, as are Kenny Guinn of Nevada and Bob Taft of Ohio.

One of the most cockeyed tax schemes has been advanced by John Rowland of Connecticut, who has called for a Clintonesque "millionaire income tax surcharge." Eight years ago, Rowland first ran for governor as a Reaganite, vowing to eliminate his predecessor Lowell Weicker's first-ever state income tax. Rowland not only swerved clear of that promise; now he wants to move from a flat 4.5 percent tax rate to a steeper, graduated rate structure. This is precisely what anti-income-tax groups in Connecticut feared all along: Once Weicker's income tax was cemented in place, politicians would jack up rates during the first signs of financial trouble. So now, a state that flourished for 200 years without an income tax has a Republican governor who can't conceive of any way to balance the budget without raising it.

But here's the really strange twist of fate in state-level politics: Suddenly many Democratic governors are shunning new taxes and trimming agency fat after a decade-long state spending feast. Admittedly it's early, but so far there are signs that the 2002 elections ushered in a new breed of ambitious, politically non-suicidal Democratic governors, including Jennifer Granholm of Michigan, Ed Rendell of Pennsylvania, and Bill Richardson of New Mexico. They all seem keenly aware that the political graveyard is filled with the tombstones of Mario Cuomo, Michael Dukakis, and Jim Florio--class-warfare Democrats who raised taxes, wrecked their states' economies, and were subsequently chased from office by unforgiving voters.

For now at least, these new-new Democrats are begging off broad-based tax hikes to plug budget holes and are actually cutting spending. Tennessee's new governor, Phil Bredesen, has dismissed Republican predecessor Don Sundquist's wildly unpopular call for a state income tax, and instead is seeking a 5 percent across-the-board spending cut to balance the budget. In Georgia, Democratic lieutenant governor Mark Taylor is pledging to fight any attempt by Sonny Perdue to raise taxes. "I am totally stunned that [Perdue] would take the easy way out and ask for tax increases," he says. "We are not like Washington, D.C., Democrats. We will oppose the tax increases."

Contrast that common-sense approach with the strange goings-on in Idaho. Kempthorne stunned even his most enthusiastic supporters in January by endorsing what would be the biggest tax increase in Idaho history. "I will not preside over the dismantling of state government or jeopardize our bond rating," Kempthorne announced sanctimoniously. Actually, states that raise taxes are more likely to have a subsequent bond rating deterioration than states that cut their budgets and cut tax rates.

Kempthorne's claim that there is no fat left to trim from bare-knuckled budgets is worth refuting, because this is the standard assurance of tax-hike advocates across the country. In many states, governors are threatening to open the prisons and shut down the schools if they don't get a new infusion of tax revenues. Kempthorne says he'd have to lay off nearly half the state troopers without new taxes. In Virginia, Democratic governor Mark Warner closed 12 Department of Motor Vehicles offices for several days a week. (They are now being reopened.) In Oregon, the governor put an income-tax-hike initiative on the ballot, which contained blackmail language warning voters that a no vote would cause schools to close a month early and force convicted felons to be immediately released from maximum security prisons. Still, more than 55 percent of the voters said no thanks to new taxes.

Now for a reality check: State lawmakers have been on the biggest spending binge in history over the past decade. Idaho's budget has grown 109 percent since 1990, and tax receipts grew even faster. How could a state budget that's doubled in size in just 12 years not have room for modest spending cuts? One wonders how Idaho residents ever survived for so long without all the new programs encrusted into the budget over the past decade of super-sized spending.

And so it goes in almost all the states pleading fiscal poverty today. A new Cato Institute study finds that if over the last decade state budgets had grown only at the rate of populations plus inflation, the states would have enough money not only to balance their budgets, but also to send every family in America a $600 refund check. The study also shows that states that spent the most have the worst budget deficits today. The states that instead prudently cut taxes during the high-tech boom years of the 1990s generally have the most manageable budget woes. For eight years the nation's biggest skinflint governor was Gary Johnson of New Mexico, who vetoed over 1,000 spending items and cut taxes 14 times. Today, New Mexico is only one of 4 states without a budget deficit.

But Gary Johnson left office last month. In fact, when looking at the talent pool in the statehouses these days, one has to wonder: Whatever happened to all the crusading anti-tax Republican governors who dominated American politics in the mid-1990s? A decade ago, star-quality governors like William Weld of Massachusetts, Christie Whitman of New Jersey, George Pataki of New York, John Engler of Michigan, and later George W. Bush of Texas helped redefine the image of the GOP--stamping it with a supply-side agenda of lower taxes, leaner budgets, and less government meddling.

"Tax increases only destroy wealth and unbalance state budgets," Engler declared as he took office in the midst of the last national recession. Today's governors could learn a lot from Engler. When he became governor, Michigan had a decomposing industrial base, a $1.5 billion budget deficit, and one of the poorest bond ratings in the nation. Engler's prescription was heady but controversial: He squashed all talk of tax hikes, cut job-destroying income and business taxes by $2 billion, fired several thousand redundant government workers, ended welfare assistance for employable adults, streamlined dozens of agencies, and earned the enduring enmity of the left-wing establishment in Michigan for his ideological heavy-handedness. The result? Michigan emerged from the recession and laid the fiscal foundation for what became known during the rest of the decade as the Michigan Miracle, as the state led the nation in declining unemployment.

Michigan isn't an isolated example of how tax policies impact state economies. In fact, one of the most enduring fiscal lessons of the 1990s is that raising taxes during a recession only prolongs a state's economic hardship and budget gaps. A new ALEC study by Ohio University economist Richard Vedder finds that the 10 states that raised taxes the most in the 1990s had one-half the population growth, one-half the number of new jobs created, and saw personal incomes grow 10 percent more slowly than the states that cut their income taxes. Consider New Jersey, where tax receipts grew twice as fast in the two years after Christie Whitman cut the income tax as they did in the two years after Jim Florio raised them. So what does current governor Jim McGreevey want to do this year? Raise taxes. When Pete Wilson raised income tax rates in California, the state actually lost income tax revenue the next year. So Gray Davis now wants to raise taxes by $11 billion and prop up income tax rates to 11 percent, which would be the highest in the country. If Davis has his way, this would be a very good time to short the real estate market in California.

In addition to seeking higher taxes, many governors are now begging Congress for bailout funds. Nothing could be more ill-advised. Congress can help states in two ways: First, pass President Bush's tax cut, so that the economy prospers and $670 billion of state taxpayer dollars stay out of Washington and in local economies. And second, devolve control over Medicaid to the states, just as we did so successfully with welfare in the 1990s, so that 50 laboratories of democracy can discover strategies for containing the raging inflation of health care costs that is now ravaging state budgets.

I have left the good news for last. Not all Republican governors have bought into the dimwitted notion that they can tax their states back to prosperity. In Minnesota, the newly elected Republican governor Tim Pawlenty has crafted a budget that essentially freezes state spending in the first year and dares the legislature to try to raise taxes. Another fresh face, Mark Sanford of South Carolina, is installing the first down payment on his plan to phase out the state income tax, despite inheriting a gargantuan deficit.

Meanwhile, the nation's two most fiscally conservative governors (and the GOP's fastest-rising political stars in recent years), Jeb Bush of Florida and Bill Owens of Colorado, remain as immovable as ever in their opposition to new taxes. "How can tax hikes solve the fiscal crisis in the states," Owens asked me in an interview, "when the budget problems are a result of chronic overspending?" Meanwhile, in Tallahassee Jeb Bush is pushing forward with the final phase of his $5.7 billion tax cut and notes that despite those tax cuts, Florida's bond rating has improved from AA to AAA. "As I look around the country," Bush observes, "I can't help but notice that the states that have enacted big, broad-based tax hikes are in the worst fiscal shape of all."

If Jeb's Republican colleagues don't start to digest that lesson soon, they might not be governors for long.

Stephen Moore is a senior fellow in economics at the Cato Institute and author of Cato's biennial Fiscal Report Card on the Governors.