Governors in a Tough Position With Shrinking Revenue

The Cato Institute's annual fiscal report card on the nations' governors is out, and it presents a discouraging picture. Here are the conclusions of Cato's Chris Edwards:

[T]here has been a disappointing lack of major spending reforms among governors of both parties in recent years. State tax policies have also been uninspiring. Most tax cuts pursued by the governors have been small and targeted breaks, not broad-based rate cuts that can foster economic growth.

Fiscal policies need to be improved if the states are to meet the huge challenges ahead. Medicaid costs continue to rise, state debt is soaring, and the pension and health care plans of state workers have huge funding gaps. At the same time, rising international tax competition makes it imperative that states cut tax rates to attract jobs and investment. Governors don't have an easy job, but they do need to pursue more aggressive fiscal reforms to meet the challenges of an increasingly competitive economy.

It's apparent now that revenues or at least rates of revenue growth are going to decline in the next couple of years, and governors will be placed in the tough position of having to cut back projected spending levels or raising tax rates. A powerful force against cutting spending in many states will be the public employee unions, which have been on a roll in this Democratic-leaning campaign cycle. They scored an incredibly important victory against Arnold Schwarzenegger in California in 2005, when they spent tens of millions of dollars and defeated his ballot propositions that threatened to end business-as-usual in Sacramento. Since then, Schwarzenegger has governed much as his predecessor Gray Davis did (he even hired a top Davis staffer as his chief of staff), trying to hold down the spending desired by the heavily Democratic legislature but not producing the restructuring of the public sector he promised in the 2003 recall campaign. As a result, California continues to lose businesses and productive citizens. And the impact on total state and local government spending is significant, since 12 percent of Americans live in California.

In this campaign year, we've been concentrating on the economic policies of the two presidential candidates and on the fiscal implications of a Congress with larger Democratic majorities. But given the economic outlook, state and local government spending is likely to result in the public sector growing at the expense of the private sector. Few governors in recent years have taken the proactive steps that many governors in the 1990s did to prevent this from happening, and now all it will take is inertia—plus all the taxpayer dollars that flow into the public employee unions, enabling them to gobble up even more taxpayer dollars.

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