Rising revenues spur tax cuts, spending

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.

In Massachusetts, Gov. Mitt Romney (R) is counting on a $1.3 billion revenue increase this year to grease the skids 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 the largest tax cut in the Sunshine State’s history – $1.5 billion, including $570 million in property tax cuts and $500 in million 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.

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 new-found 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.

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-class families and offer some elderly residents a $500 fuel tax credit.

Tax cuts also are being suggested by Arizona Gov. Janet Napolitano (D), who is urging $100 million in targeted tax credits and cuts that she has dubbed “smart tax relief,” and Kansas Gov. Kathleen Sebelius (D), who 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.

Wisconsin Gov. Jim Doyle (D) has proposed a “living wage” tax credit as one aspect of a broad “affordability agenda” designed to assist families struggling to stay afloat in the Badger State.

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.

But 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 Scott Pattison, executive director of the National Association of State Budget Officers (NASBO).

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 (NCSL).

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.

Nowadays, 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 this 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 of NASBO.

Still, experts warn that states are not likely to begin a bonanza of new spending. While revenues are rising, Medicaid and other health care bills also are rising and 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 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-cent 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.

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 Dec. 20 by the National Governors Association (NGA) and NASBO. That’s a sharp contrast to 2002, when 37 states made $15 billion in mid-year budget cuts, according to the report.