- The Washington Times - Sunday, March 6, 2005

Last week the governors were in Washington seeking more handouts from Uncle Sam for programs like Medicaid. But governors don’t need Congress’s help to balance their budgets.

What’s clear in examining state finances is that the governors who have set up pro-growth economic policies of low taxes and fiscal restraint have been able to eliminate budget deficits. Those who have tried to tax and spend their way to prosperity still face waves of red ink.

One governor who got it right is Arnold Schwarzenegger. Two years ago, the Golden State’s fiscal woes were so deep the state treasurer announced that, even if every state trooper, every high school teacher and every prison guard were laid off, Sacramento would have faced a $5 billion deficit.

Now the state has turned the fiscal corner, thanks to a combination of fiscal austerity, faster growth and the pro-business, tax-cutting governing philosophy of America’s most famous governor, Mr. Schwarzenegger.

The governor eliminated the hated car tax, held a governmentwide “garage sale” to dispose of excess state property, from computers to staplers, and created a a budget task force that found $32 billion in savings over five years by eliminating more than 100 state boards and privatizing state assets. Mr. Schwarzenegger has refused to budge on his opposition to new taxes and he gained national attention when he declared legislators who opposed his tax- and budget-cutting schemes were “girly men.”

Another prominent governor, Democrat Bill Richardson of New Mexico, slashed income tax rates from 8 percent to 5 percent and cut the capital-gains tax. Mr. Richardson correctly notes “New Mexico cannot retain a high trained work force and jobs if our taxes are much higher than those of our neighbors.”

The New Mexico economy has recovered briskly from the recession and the unemployment rate is now below the national average. It’s no wonder Mr. Richardson is seen a leading candidate for the Democratic nomination for president in 2008.

This lesson — tax cuts and tight-fisted budgets can encourage economic development and new businesses and jobs — has been lost on many other governors.

Just in the past month, newly elected Indiana Republican Gov. Mitch Daniels proposed an income tax increase on the rich to avoid cutting government. North Carolina’s Democratic Gov. Mike Easley has proposed a once-unthinkable 50 cent per package increase in the cigarette tax down on tobacco road. And these proposed tax increases come on the heels of giant combined tax rises across the country in state capitals from Atlanta to Seattle in recent years. Income and/or sales tax have been raised in Alabama, Idaho, Illinois, Pennsylvania, New Jersey, New York and Virginia. It’s no surprise many of these states are still struggling economically.

In the context of these divergent state budget-balancing strategies we present the results of the Cato Institute’s fiscal policy report card on the nation’s governors.

We use objective measures to compile a fiscal restraint index for each governor. Those who cut taxes and spending the most set the highest grades. Those who raised taxes and spending the most get the lowest grades. See table for the grades of the governors. Selected evaluations follow:

• Jeb Bush of Florida has been one of the most innovative governors. In his two terms, Mr. Bush has cut property taxes, eliminated the business franchise tax, enacted the most pro-reform educational choice and accountability bill in the nation and reformed the welfare system in Florida. He now leads the charge on the thorniest of all state issues: Medicaid reform.

• When Rick Perry became governor of Texas in 2000, the recession hit with full force and the state soon faced a $10 billion two-year deficit. Pressures to raise taxes to close the gap were intense, but Mr. Perry instituted a zero-based budget to force the state agencies to justify their continued existence and funding and cut spending in all low-priority programs.

Last year, with the state under a court-ordered school refinancing mandate, Mr. Perry refused to succumb to the clamor for a new state income tax, and instead called for a $6 billion property tax cut as part of the new funding formula.

Mr. Perry says his governing philosophy is that “new taxes never created a single new job.”

• One of the most overrated governors has been Virginia Democrat Gov. Mark Warner, whose only “accomplishment” has been to violate his solemn campaign pledge never to raise taxes. Instead, last year he enacted the biggest tax increase in the Comnomwealth’s history, though the year before voters decisively rejected this same plan as a ballot initiative.

Mr. Warner’s lust for higher taxes was so great he signed the measure into law though the state had a projected $500 million budget surplus without the revenues. Now with Richmond awash in revenues, Mr. Warner has proposed the biggest increase in the state budget in years. Mr. Warner is no “new Democrat” but a classic tax and spender.

It’s not just in Virginia that voters have rejected higher taxes only to be overruled by governors, state legislatures, and in some cases the courts. In recent years, voters from Alabama to Oregon have by 2-1 margins rejected tax increases to solve state overspending. Voters seem to instinctively understand raising taxes is no formula for bringing back businesses and good-paying jobs. So far successful governors from Arnold Schwarz-enegger to Jeb Bush to Bill Richardson understand that message; it has been the key to their success. Too bad there are so few other governors who follow their lead.

Stephen Moore is a senior fellow at the Cato Institute. Stephen Slivinski is director of budget studies at Cato.


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