Among Governors, A Deficit of Foresight
From coast to coast, governors are tiptoeing around gaping deficits in state budgets. They have appeared suddenly, like sinkholes in tapped-out oil fields: $12.5 billion in California, $1.4 billion in Michigan, $533 million in Kentucky. These shortfalls are small by federal standards. But unlike the government in Washington, state governments must balance their budgets every year: Virtually all are forbidden, by law or constitution, from running deficits. As a result, 40 states must close a collective $40 billion in deficits for fiscal 2002, according to the National Association of State Budget Officers.</br></br>But this being an election year, the story doesn't end there. From Hartford to Sacramento, these gaps are generating significant political tension. Virtually every state chief executive has ruled out the most potent revenue-raising weapon in his or her arsenal: income tax increases. And that's a mistake. Governors are turning their backs on the most ready source of revenues -- as well as the fairest and most painless way of raising funds.</br></br>It wasn't always this way. During the last recession, in the early 1990s, governors and big city mayors faced much the same challenge. Many of them, Democrats and Republicans alike, took what seemed to be the easy route. They simply cut spending and pushed through income tax hikes. Presidents George H.W. Bush and Bill Clinton pursued essentially the same strategy, boosting marginal income tax rates on the highest-earning Americans.</br></br>But while the income tax increases of a decade ago proved to be solid fiscal successes, they were abject political failures. And as a result, today's governors treat income tax increases the way members of the Texas congressional delegation treat Enron. They shudder even to mention the powerful force that until recently provided them with immense benefits even though, from a fiscal perspective, it makes the most sense to tax the richest vein of revenues.</br></br>Never mind the hoary debate over regressive sales taxes and progressive taxes on income. Raising taxes on income simply doesn't enter the vocabulary of today's governors, regardless of their party. Instead, today's fiscally challenged governors are earnestly pledging to cut spending, commandeering funds from the tobacco settlement, and placing big bets on two fiscal long-shots: a swift economic recovery and increased federal aid. Those who are raising revenues are embracing less politically painful -- and likely less effective -- taxes on cigarettes, telephones, sales and services.