Arizona Policy Choices

Balancing Acts: Tax Cuts and Public Policy in Arizona


States Control Spending Despite the Tax Windfalls

Anticipating Future Economic Downturns

David Cay Johnston, The New York Times
The New York Times, January 27, 1997

Five years of economic growth have left state governments flush with money. But instead of spending it, they are generally building rainy day funds and letting a little trickle back to residents through rebates and tax cuts.

The trend is a break from what usually happened when the economy boomed, when states often used increased tax revenues to make up for spending cuts or enacted programs postponed by an earlier recession.

The states' new restraint on spending, and the trimming of tax rates, show both the response of elected officials to anti-tax sentiments and efforts to avoid a painful mix of spending cuts and tax increases in the next business decline say officials who study state finances. The states are also wary about future financial aid from the Federal Government, the experts say.

Last year, the states on average held spending increases to 4 percent, not much above inflation, while their revenues grew at more than 6 percent. Over all, states count on personal income taxes for 31 percent of their revenues, while general sales taxes bring in one-third of the total. Most of the rest comes from taxes on corporations, tobacco, alcohol.

Nine states expect their revenues to be 10 percent above the figures projected in their budgets. Texas, Michigan, Minnesota and Indiana expect to pile up surpluses of more than $1 billion each.

This year, tax cuts or rebates will take effect in 27 states. In the last two years, tax reductions had been enacted by 32 states, including New York, New Jersey and Connecticut.

"When you have had this surge in revenue growth in the past, the states spent a good share of it," said Raymond C. Scheppach, executive director of the National Governors Association, who is a former deputy director of the Congressional Budget Office.

While more than half the nation's governors are busy honing images as tax cutters, many of the reductions have been tiny. More than half of the total dollar reductions were in New York and New Jersey, both led by Republican governors. Tax-rate cuts have reduced revenues by $4.2 billion in New York since George E. Pataki became Governor in 1995 and by $2.8 billion in New Jersey since Christine Todd Whitman became Governor in 1994.

State tax cuts in the last three years amounted to less than 1 percent of state government revenues nationwide, according to the Center for the Study of the States in Albany.

The big tax cuts in New York and New Jersey have been the exception to rebates and holding onto surplus revenues. The two states' aggressive tax reductions may put them in sharply contrasting positions to the rest of the country the next time the economy falters and tax revenues weaken.

One state with a conservative approach is Michigan, which had a surplus of nearly $1 billion, but did not cut taxes last year. Budget officials in several states said one reason to build surpluses before cutting tax rates was uncertainty about how to pay for jobless and welfare benefits for people who would be thrown out of work in the next recession.

Minnesota anticipates a $1.4 billion surplus in the current fiscal year and Gov. Arne H. Carlson, a Republican, is proposing to return $261 million in a one-time tax rebate that would be paid just before Christmas, and to cut the tax-rates to bring a $240 million yearly reduction in revenues.

Iowa, with just 2.8 million residents, has $440 million set aside, and is expected to add another $334 million this year. Gov. Terry E. Branstad, a Republican, has proposed a cut in the tax rate that would reduce income tax revenue by $200 million a year, which means the state's surpluses should increase next year if the economy continues to expand.

The states collected 6.2 percent more in tax revenues in the second quarter of 1996 than in the comparable period a year earlier, the Center for the Study of the States said in an analysis of the latest available detailed revenue data.

Donald J. Boyd, director of the center, said that in that quarter, state income taxes withheld from paychecks grew at 10 percent or more in nine states California, Colorado, Georgia, Kentucky, Minnesota, Oregon, Utah, West Virginia, and Wisconsin. And, if not for cuts in income tax rates, these tax receipts would have grown by double digits in three more states, Connecticut, New Jersey and New York.

Taxes withheld from pay checks are considered relatively stable revenues. But in some states, including New York and New Jersey, even faster growth is taking place in tax payments on estimated income, which tend to be made by people with higher incomes who get much of it from bonuses and from the sale of stock and other assets. Stock prices are up currently but if they should fall, tax revenues from capital gains could diminish rapidly.

In New York and New Jersey, whose state income tax revenues are highly dependent on earnings of people in the financial services industry in Manhattan, bonuses also appear to be generating extra tax dollars. New York counts on the income tax for half of its revenues, a higher level than most states.

H. Carl McCall, the New York State Comptroller, has criticized the tax cuts backed by Governor Pataki. "He has cut taxes without a plan to get the revenue to make up for the cuts," Mr. McCall said. "The Governor's budget assumes that the boom on Wall Street will continue, but if that doesn't happen New York will be facing a serious problem."

The state expects a $1 billion surplus this year, which Governor Pataki wants to use for further tax cuts, putting aside $65 million in a rainy day fund, the maximum allowed by law. Mr. McCall said more of the surplus should be used to pay down debts or prepay expenses.

New Jersey also relies heavily on Wall Street bonuses for income tax revenues.

Connecticut, where a $200 million state income tax cut takes effect this year, is not as vulnerable to the economic ups and downs as it is to what Richard Netzer, a professor at New York University, calls a "long-term problem because of its enormous dependence on the rapidly contracting defense industries."

Tax revenues are coming in below projections only in Hawaii, where tourism has been flat; Idaho where corporate income taxes are 37 percent below projections, and Tennessee, where overall revenues are 2 percent below projections.

No state is considering raising income, sales, or business taxes, according to the National Conference of State Legislatures.

But eight states are considering higher excise taxes, according to the conference. Higher gasoline taxes are being considered in Pennsylvania, Utah and Wisconsin and higher cigarette taxes have been proposed in Alaska, Florida, Maryland, Oregon and New Hampshire. The Alaska proposal would raise the current 29 cents-a-pack levy by a dollar.

Politicians are heeding the public's change in mood over taxes and spending

Georgia is phasing out one of the most regressive taxes in the country, a sales tax on groceries. Arkansas, Louisiana and Missouri are considering reducing sales taxes on food.

Some state budget officials say that surpluses may invite Washington to avoid helping the states.

"The Federal Government is talking seriously about balancing its budget," said Carol Koch, Iowa Deputy Treasurer, "and if the Federal Government realizes that the states have huge surpluses they are going to look to the states to solve some of Washington's problems."

Copyright © 1997 by The New York Times, January 27, 1997. Reprinted by permission.


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