- The Washington Times - Sunday, July 13, 2003

Most state spending is expected to rise in the coming fiscal year, even though governors claim budget deficits have forced them to cut expenditures to the bone.

Governors and state legislative leaders repeatedly have complained that they are undergoing a fiscal crisis forcing them to make deep, across-the-board cuts in spending because of a weakened economy that has sharply reduced state-tax revenues.

But the Fiscal Survey of States released at the end of last month by the National Governors Association shows that tax revenues are expected to rise in the aggregate by nearly 3 percent, say budget analysts who have been studying the NGA’s recent data.

State revenues, which totaled nearly $470 billion in fiscal 2003, are expected to rise to $482 billion in the 2004 fiscal year. “That is a 2.6 percent increase in tax revenues,” said Chris Edwards, director of fiscal policy for the Cato Institute.

The NGA data also show that contrary to continued claims that states’ spending is being slashed as never before, expenditures will actually climb modestly in the aggregate when California is removed from the equation.

The NGA survey shows that proposed spending remained essentially flat between fiscal 2003 and 2004 at $482 billion, but budget analysts say that this state-spending figure is distorted and skewed by California, which will have to cut spending deeply to offset a looming $38 billion deficit.

“Some states are cutting spending, but NGA data show that for the 49 states other than troubled California, spending will still rise by more than 2 percent in the 2004 fiscal year,” Mr. Edwards said.

But this is not the fiscal picture painted by newspaper and nightly television news reports on the states’ budget problems.

The Washington Post, for example, reported recently 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 also has fed much of the impression that a majority of governors across the country were raising major taxes, and that expenditures were either barely growing or were expected to decline in the 2004 fiscal year.

“Governors in 29 states recommended tax and fee increases in fiscal 2004,” the NGA said in its latest fiscal scorecard. “Further, state spending growth was cut to only 0.3 percent in fiscal 2003 and is expected to decline 0.1 percent in fiscal 2004.”

Interviews with budget analysts last week painted a different picture. Most governors were not raising major, broad-based taxes on income, retail sales and property, they said. Instead, most were proposing or had enacted smaller “sin taxes” on alcohol, tobacco and gambling, and sales taxes on hotels, rental cars and a range of fee increases for state services.

With the exception of two megastates, California and New York — which account for about 18 percent of the population — “the rest of the picture isn’t so bad. Actually, the governors on balance have done a very good job of dealing with this budget mess,” said budget analyst Stephen Moore of the Club for Growth. Mr. Moore publishes an annual score card on how the states are handling taxes and spending.

“Actually, 12 states have raised major taxes this year on incomes, retail sales or property. That’s not many given the fact that this is the worst fiscal crisis in the states since 1980,” Mr. Moore said.

“The reason a lot of governors have been reluctant to raise major taxes is, first, that a lot of them understand the economic reality that states cannot tax their way to prosperity, and, second, they also understand political realities,” he said.

Many governors, both Republicans and Democrats, have refused to raise taxes and have found other ways to balance their budgets by slowing the growth in spending. Republican Gov. Jeb Bush of Florida and Democratic Gov. Bill Richardson of New Mexico have cut taxes to spur economic growth and curbed spending.

Gov. Jennifer Granholm of Illinois, a Democrat who also turned down proposals for major tax increases, called for raising the tax on diesel fuel and for higher state fees.

In Minnesota, Republican Gov. Tim Pawlenty stuck to his campaign promise to oppose tax increases and has cut spending instead. Fees for camping in state parks, license plates and visiting the zoo all will go up.

In Colorado, Republican Gov. Bill Owens refused to even consider higher taxes but raised fees for dozens of licenses, permits and other state services.

“States have spent their way into this budget problem,” said Duane Parde, executive director of the American Legislative Exchange Council, which represents state lawmakers.

“The spending increases during the late 1990s when the economy was booming were greater than the rate of inflation. When the economy stalled starting in 2000, their spending was at a very high level, and their declining tax revenue could not support that,” Mr. Parde said.

However, he quickly points out that “it’s not just a Democratic or Republican issue. You’ve got some Republican governors pushing huge tax increases as well as Democrats.”

Among the Republicans, New York Gov. George Pataki pushed through a $3.2 billion income-tax and sales-tax increase plus a higher cigarette tax, and Nevada Gov. Kenny Guinn was in a political battle with his legislature over his own tax plan.

In California, which faces a $38 billion budget deficit, Gov. Gray Davis, a Democrat, is locked in struggle with Republican leaders over his plan to balance the budget with a combination of $8 billion in tax increases and additional spending cuts.

“What’s causing the fiscal bleeding in California is that the state is losing its entrepreneurial class, its business owners and its high-wealth individuals,” Mr. Moore said.

As of last week, 22 states have raised or are considering proposals to raise a variety of taxes, large and small, by $11.9 billion, according to a state-by-state survey by ALEC officials. Only seven states have passed broad-based income or sales taxes, and 10 states have raised cigarette taxes. Six states have not completed their budgets.

Meantime, whether the states are truly cutting as much as NGA analysts say they are is a matter of debate.

“I have not seen a lot of spending cuts around the country. I’ve seen budget gimmicks such as borrowing from the state pension funds,” said Brian Riedl, a budget analyst at the Heritage Foundation.

“I don’t think there is anyone who believes that states are cutting to the bone. Since 1990, state spending has grown by 50 percent, adjusting for inflation,” he said.

But, Mr. Riedl said, the states grew at nearly twice the rate of federal spending.

In California’s case, for example, state-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,” he said.

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