- The Washington Times - Wednesday, July 16, 2003

There are a lot of myths and misconceptions about the fiscal plight of the states that need to be dispelled right now.

To hear the National Governors Association and much of the national news media tell the story, President Bush’s tax cuts have made the states’ revenue situations worse, spending has been slashed to the bone, and most legislatures have been forced to raise taxes to balance their budgets.

In fact, the depth of the states’ spending cuts is dubious; relatively few states have passed broad-based income tax increases; and Mr. Bush’s tax cuts have not only helped to offset whatever state tax and fee increases have been passed, they will stimulate economic growth that will help boost state and municipal operating revenues.

Perhaps the most specious claim of all — pushed by the NGA’s left-of-center staff — is that state spending is being deeply cut across the board.

Yes, state and municipal governments have had to tighten their belts in the last three years of the economic slump.

But the Fiscal Survey of States released last month by the NGA shows that tax revenues are actually expected to rise in the aggregate by nearly 3 percent, according to budget analysts who have studied NGA’s latest data. State revenues, which totaled nearly $470 billion in fiscal 2003, are expected to rise to $482 billion in the current 2004 fiscal year.

“This is a 2.6 percent increase in tax revenues,” says Chris Edwards, director of fiscal policy for the Cato Institute.

The NGA’s balance sheet also shows that contrary to persistent claims that state expenditures are being slashed as never before, spending in the aggregate will actually show a modest rise when California’s huge fiscal hole is removed from the equation.

Budget analysts tell me total state spending is skewed by California which will have to cut spending deeply to erase a monstrous $38 billion deficit. “Some states are cutting spending, but NGA data show that for the 49 states other than California, spending will still rise in the aggregate by more than 2 percent in the coming fiscal year,” Mr. Edwards said.

This is hardly the dire fiscal picture being drawn by many newspapers and the nightly network news shows. The Washington Post, for example, reported 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 has also fed the impression that most governors have been raising taxes and state spending has been shrinking. “Governors in 29 states recommended tax and fee increases in fiscal 2004,” the NGA said in its latest fiscal report. “Further, state spending growth … is expected to decline 0.1 percent in fiscal 2004.”

That’s not how outside budget analysts interpret the data. Most of the governors were not raising major, broad-based taxes on income, retail sales or on property. Instead, most have looked to “sin taxes” on alcohol, tobacco, gambling and a broad range of higher fees for state services.

With the exception of the two mega-states, California and New York — which account for nearly 20 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 at the Club for Growth.

“Only about 12 states have raised major taxes this year on incomes, retail sales or property,” Mr. Moore says. “That’s not many” in light of the fiscal pressures they are under.

The reason so many governors have rejected major tax increases is that they recognize that higher taxes will only hurt their economies and future revenue growth.

For example, Republican Gov. Jeb Bush of Florida has cut taxes, as has Democratic Gov. Bill Richardson of New Mexico. Illinois Gov. Jennifer Granholm, a rising Democratic star, also turned down major tax increases and called for higher state fees and a tax on diesel fuel.

In Minnesota, Republican Gov. Tim Pawlenty kept his campaign pledge against higher taxes by raising fees and slowing spending instead.

What is really to blame for the budget shortfalls? Unrestrained spending during the high-growth ‘90s when the money was rolling into state coffers and lawmakers were spending it like there was no tomorrow.

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

“Since 1990, state spending has grown by 50 percent, adjusting for inflation. State spending grew at nearly twice the rate of federal spending,” Mr. Riedl said.

In California’s case, 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.

There’s a lesson in all this that businesses understand but too many politicians never learn: Be frugal during good times when the revenues are pouring in so there will be enough money to tide you over when funds are tight.

Donald Lambro, chief political correspondent for The Washington Times, is a nationally syndicated columnist.

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