Rising Revenues Spur State Tax Cuts, Higher Spending

Published April 1, 2006

From Massachusetts to Hawaii, signs abound that the immense pressure placed on state budgets by the fiscal crisis early this decade has eased–and put tax cuts and new spending in the realm of possibility for the first time in several years.

Revenues met or exceeded expectations in every state during the 2005 fiscal year, which ended June 30 in most states, according to a survey of state finances released December 20 by the National Governors Association (NGA) and National Association of State Budget Officers (NASBO). That’s a sharp contrast to 2002, when 37 states made $15 billion in midyear budget cuts, according to the report.

In Massachusetts, Gov. Mitt Romney (R) is counting on an expected $1.3 billion revenue increase this year to grease the way for his proposals to furnish a laptop computer to each of the state’s 120,000 sixth- and seventh-graders and to cut the income tax rate from 5.3 percent to 5 percent over two years.

In Hawaii, Gov. Linda Lingle (R) is touting a $235 million tax cut package that would trim tax bills by raising the standard deduction. It also would aid the poor by providing a $150 tax credit to families earning less than $50,000, to defray the cost of food and over-the-counter medicines.

Florida Gov. Jeb Bush (R) is pushing for the largest tax cut in the Sunshine State’s history–$1.5 billion, including $570 million in property tax cuts and $500 million in tax rebates for homeowners. All Floridians who own a home will receive a check for $100 under the proposal. About $3.2 billion in unanticipated revenues have opened the door for the tax cuts during Bush’s final year as governor.

Pols Hope to Benefit

Such proposals are a far cry from the budget cuts that had been common since 2001, when states were hit by their worst fiscal crisis since the Great Depression. But an economic turnaround has contributed to rebounding revenues and improved fiscal conditions in nearly every state just in time for the latest round of budget writing and the 2006 election.

With 36 governors’ seats and more than 80 percent of state legislative posts up for grabs this November, the newfound breathing room in state budgets may give Republicans a chance to recapture one of their favorite election-year issues–tax cuts–and is tantalizing for Democrats as well.

Governors Talk Tax Cuts

Nebraska Gov. Dave Heineman (R) is seeking $21 million in cuts to income, sales, and property taxes. Heineman, who said the state’s improving economy has created a “golden opportunity” to pad the pockets of the state’s taxpayers, would slash income taxes by 3 percent across the board.

New York Gov. George Pataki (R), who is not seeking re-election but is thought to be weighing a presidential run, has proposed a range of tax cuts amounting to more than $1 billion a year. Pataki would eliminate the state estate tax, reduce the income tax on middle-income families, and offer some elderly residents a $500 fuel tax credit.

Also suggesting tax cuts is Arizona Gov. Janet Napolitano (D), who is urging $100 million in targeted tax credits and cuts that she has dubbed “smart tax relief.” Kansas Gov. Kathleen Sebelius (D) wants to nix the property tax that businesses pay on new machinery and equipment, in hopes of providing a shot in the arm for the state’s economy.

On the spending side, extra income and sales tax collections have allowed Idaho Gov. Dirk Kempthorne (R) to suggest mailing a $50 check to every state resident to help pay winter heating costs. At the urging of Gov. Sonny Perdue (R), the Georgia legislature kicked off its session by temporarily reducing the state sales tax on home heating fuels.

Education Tops New Spending

Education, particularly elementary and secondary schools, tops the list of areas where governors are proposing new spending.

In Oklahoma, 82 percent–or $256 million–of the $314 million in new spending Gov. Brad Henry (D) is proposing would benefit education in the form of classroom improvements, teacher pay raises, college scholarships, and other programs. “Oklahoma has many other needs that should and will be met this year, but students and teachers must come first,” The Oklahoman quoted Henry as saying.

Health care, corrections, and road and other infrastructure improvements also are vying for any newly available state dollars, said NASBO Executive Director Scott Pattison.

After closing budget gaps of more than $250 billion since 2001–in large part by making deep cuts to programs and services–new pressure is building to meet huge pent-up demands for state spending on roads, school construction, and other infrastructure improvements, said Arturo Perez, a fiscal analyst at the National Conference of State Legislatures.

Schwarzenegger Backs Huge Hike

That pent-up demand in California has prompted Gov. Arnold Schwarzenegger (R), who is trying to turn around his sagging approval ratings in time for the November elections, to appeal to California voters to pass a $25 billion bond package–the first phase in a 10-year plan to spend more than $200 billion upgrading the state’s aging infrastructure.

Currently, states facing serious financial difficulties are the exception rather than the rule. Michigan, for example, is coping with the economic effects of the sputtering auto industry. Louisiana and Mississippi, battered last summer by Hurricanes Katrina and Rita, are struggling to rebuild and regain their financial footing.

“Outside of that, you could close your eyes and point to anywhere on the map of the United States and you’d pretty much have to say that they’re doing well and they’re able to spend some extra money,” said Pattison.

Health Costs Remain Concern

Still, experts say most states are not likely to begin a bonanza of new spending. While revenues are rising, Medicaid and other health care bills also are increasing and are claiming a greater share of state budgets.

Sin taxes are still on the table. Indiana Gov. Mitch Daniels (R), nicknamed “The Blade” when he served as President George W. Bush’s budget director because he was fond of cutting government spending, is calling for a tax increase for the second year in a row–a 25-cent per pack hike in the state’s cigarette tax.

In Iowa, Gov. Thomas Vilsack (D) has proposed an 80 cents per pack increase in the cigarette tax as part of a package of tax and fee hikes to help finance a proposed state spending increase of nearly 7 percent.

Iowa’s economic about-face mirrors the story of many other states. When Vilsack was seeking re-election four years ago, the state was in the midst of contracting revenues and severe budget cuts. This year, Vilsack has proposed an ambitious 6.9 percent increase in state spending. Like Romney, Vilsack is considered a possible 2008 presidential contender and is serving his final year as governor.

Kathleen Hunter ([email protected]) is a staff writer at Stateline.org. This article originally appeared January 31, 2006. Used by permission.