As the budget season rolls on, a remark- able trend is emerging: States with Republican governors and legislative majorities are balancing their budgets and reforming key programs without raising taxes. Conversely, states with Democratic governors and legislatures are content to raise taxes without basic program reforms. This philosophical and partisan divide focuses on the age-old question of the proper size and scope of government, and Republicans and Democrats are providing starkly different answers.
Republican-led states that have enacted budgets without tax increases include Ohio, Wisconsin, Pennsylvania, Indiana, Maine, Texas and Florida. Pennsylvania, Texas and Florida reduced spending in absolute terms. In addition, virtually all of these states offered some tax reductions for business investment designed to generate more job growth. Indiana cut its corporate tax rate. Maine cut its top marginal individual rate at a time when Democratic governors are trying to raise theirs. Pennsylvania phased out the business-franchise tax for thousands of small businesses. New Jersey put a cap on local property tax increases, and Ohio phased out the “death tax.” Republican leaders in those states realize that while the spending side must remain in check, growing revenue and generating new jobs is the long-term answer to their states’ fiscal health and financial future.
One long-term reform pushed by many states involves public pensions and health benefits. In too many states, the state employees pay very little toward their own retirement and health care. These plan benefits are far more generous than those available to workers in the private sector. States that have reformed public pension and health programs by requiring greater employee contributions include Wisconsin, Ohio and New Jersey. Maine strengthened its program by capping cost-of-living increases. An allied reform enacted in some of these states limits the ability of public-employee unions to bargain for overly restrictive work rules. State and local officials must have the flexibility to use employee talents in the most effective and efficient manner possible.
Education reform also has realized a banner year in 2011. Florida, Georgia and Oklahoma have expanded their tuition tax credit programs. Wisconsin and Ohio dramatically expanded their school voucher programs. Indiana’s new education plan ensures that the Hoosier state will continue to be a leader in the development and use of both charter schools and voucher programs. The common theme of all of these education initiatives is to expand choice for parents and students to select the school best suited to meet their individual needs.
One area that is begging for reform is Medicaid, the federal-state program that provides health care to the poor. Virtually every state governor has lamented the need for a federal waiver if a state wants to deal with this most costly and inefficient program. Worse, Obamacare requires states to cover even more people without offering full reimbursement for this federal mandate. Governors will say that block grants to states, coupled with enhanced state authority to design their own eligibility and delivery programs, would provide important efficiencies in the short term and ensure survival of the program in the long term.
Contrast this impressive record with the solutions pursued by Democratic majorities in Illinois and Connecticut. Both states raised taxes substantially on everyone, not just the rich, and did little to reform state programs that continue to grow out of control. The lesson is clear: Once higher taxes are on the table, everything else comes off. Along with California, these states continue to kick the can down the road, postponing the day of reckoning. States that rationalize their public sectors now will have a decided advantage attracting business and jobs and providing economic opportunity for their residents.
Every rule has an exception, and the exception here is Democratic Gov. Andrew Cuomo of New York. He pressed his legislature to close New York’s budget gap without new taxes, and he succeeded. Good for him. One wonders how much pressure he felt to remain economically competitive with the neighboring states of New Jersey and Pennsylvania, both of which pursued a similar strategy.
Republican majorities in states are demonstrating that balanced budgets without new taxes are possible if officials are willing to make tough choices and tell the truth to the voters. If it can be done at the state level, why can’t it happen at the federal level?
The voters will have a chance to answer that question next year.
Frank Donatelliis chairman of GOPAC.