Budgets, Bonds and Ballots
By Raymond C. Scheppach, Commentary
The race between President George W. Bush and Senator John Kerry might have been the marquee match-up on election night, but, by no means was it the only closely monitored contest last week. Voters in 34 states cast ballots on more than 160 different ballot initiatives, propositions and referendums, as well. The results of these contests not only confirmed recent trends in state fiscal policies, but they also signaled future caution for state lawmakers. Across the country, voters embraced new infrastructure and economic development initiatives if they could be financed by bonds, but broad based tax increases, even those that supported education, failed. While voters overwhelming supported tax increases specifically tied to cigarettes and tobacco, not all voters were as enthusiastic about measures for new gaming revenues.
Due in part to extremely tight fiscal situations and low interest rates in the last few years, states have largely shifted their strategies for financing short-term capital projects from general funds to long-term bonds. On Tuesday, voters not only confirmed this trend but, in fact, accelerated and magnified it. Of the 21 bond issues on state ballots this election cycle, 18 were overwhelmingly approved. While most of these bond measures will expand transportation and other existing infrastructure investments, others included $3 billion for a state-sponsored embryonic stem cell research in California and $150 million for environmental conservation projects in Utah.
In the wake of the dot-com bubble's collapse, state revenues plunged 8 to 10 percent in the first two quarters of 2002. In response, governors and state legislators dramatically cut spending. In an effort to continue balancing budgets, states increasingly looked to raise taxes on cigarette and tobacco purchases rather than choosing to raise personal income and sales taxes. Between 2003 and 2005, cigarette and tobacco tax hikes accounted for more than a quarter of all state revenue increases. Based on Tuesday's results, this trend shows few signs of losing steam. Colorado, Montana, and Oklahoma all had ballot initiatives increasing cigarette and tobacco taxes between $0.55 and $1.00 per pack all three passed, easily. Voters in Colorado, who defeated a similar measure a decade earlier, approved the measures with over 60 percent of the vote, due partly to the fact that revenues were dedicated to health spending.
In the last few election cycles, many ballot initiatives that tied tax increases to education were winners. Election 2004 was a whole different story. This year, Arkansas voters rejected a measure to increase statewide property taxes for local school funding by a more than two to one margin. In Washington State, an initiative that would have increased the sales taxes by one percentage point for education to reduce class size and raise teacher pay failed 39-61 percent.
In South Dakota, on the other hand, voters defeated an initiative that would have exempted food from the state sales tax. In Maine, 63 percent of the voters resisted the urge to rollback state property taxes, a measure similar to California's' landmark Proposition 13. In years past, voters, who considered state lotteries, casinos and Indian gaming measures a palatable alternative to tax increases, strongly supported many gambling initiatives. Not so this year. While Oklahoma voters approved a couple of Indian gaming measures last week, Nebraska, California, and Michigan voters all defeated gaming-related initiatives.
Local circumstances and issues are just that, local. It's easy to make too much of the referendum results. So while it is difficult to draw major conclusions from these recent ballot initiative wins and losses, there are some clear lessons and warnings that provide valuable information to those in charge of our annual state budgets. Time and again this go around, voters have given the green light to bond financing of critical infrastructure and economic development initiatives, and with equal vigor they favor increasing cigarette taxes particularly when they are dedicated to expanding health care coverage. Voters, however, sent some mixed signals on Tuesday. Policymakers would be wise to heed these electoral warnings as voters nationwide neither accepted nor rejected broad based tax decreases and increases even if linked to education. In addition, voters are becoming more skeptical about increased revenues from gaming.
Voters had a host of important issues to decide when they entered the voting booth, but the recent ballot measures are important as much for what they did not address as what they did address. Despite the fact that state tax systems are woefully obsolete, there was not a single initiative on a statewide ballot, addressed tax reform. It's as if it has become the third rail of referendum politics. Perhaps there is some hope now that President Bush has put tax reform at the top of his domestic agenda. Will this be the impetus states need to present revenue neutral tax reform proposals, which lower rates while expanding the tax base? We can hope. Who knows, maybe two years from now, we will be analyzing the results of the tax reform referenda on the 2006 election ballots.
Raymond C. Scheppach, Ph.D., is the executive director of the National Governors Association. The views expressed here are those of the author and do not necessarily represent those of the National Governors Association.