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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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.