by Howard Stephenson
Utah has been named the number one “financial steward” in America, followed by Georgia and Delaware according to a USA Today analysis published in June. The report named Utah as the best financially managed state in the nation. The highest ranking states’ key to success, according to USA Today, is restraint. The newspaper said that during the economic boom of the late 1990s, these states limited both spending growth and tax cuts. Then, after the economy weakened in 2001, they acted swiftly and decisively to keep their finances sound.
USA Today determined that “. . . the financial problems racking many state governments this year have less to do with the weak economy than with the ability of governors and legislators to manage money wisely.”
I agree that over the past five years Utah has managed its budget shortfalls better than most other states. However there are some lessons to be learned from Utah’s handling of the budget crisis.
The USA Today analysis claims that tax cuts and spending growth have contributed to crippling deficits. I agree only with the ‘spending’ half of that statement. It is clear that the enormous increases in state spending — not tax cuts — were the main cause of state deficits. During the nineties, state legislatures across the nation found the economy was producing more revenues than they had budgeted. Consequently, they began spending like a drunken sailor home on shore leave. Even with the higher spending, surpluses kept piling up. So they increased spending even faster in the next budget.
Fortunately, in 1995 and 1996 the Utah legislature decided to slow spending growth by cutting taxes $170 million. This was done by slashing the statewide basic school property tax rate in half and by dropping the state’s maximum personal income tax rate from 7.2% to 7.0%. As surpluses continued to accumulate the legislature responded by a one-time inflationary adjustment in state income tax brackets and several smaller tax cuts. To prevent spending growth, millions of dollars were also placed in rainy-day funds.
During the economic boom taxes were cut in several states, but the size of government still grew at an accelerated rate. For example, annualized per student (K-12) education spending between 1992-2002 grew nationwide by 4.5% while state spending increased 86% nationwide between 1990 and 2001. If state spending had not grown at such an alarming rate the smaller tax yields brought on by a slow economy would have sufficed. Therefore, contrary to the USA Today analysis, it is safe to say that tax cuts, in comparison to increased spending, had a minimal, if any, detrimental impact on state budget deficits.
In my opinion, Utah could have done one more thing to accomplish better budget balancing: cut the size of government rather than using one-time revenues and increased borrowing. In addressing the FY 2002 budget shortfall of nearly $400 million, the legislature cut spending by only $144 million. The rest of the budget balancing came mainly from spending one-time reserves and issuing bonds to free-up cash that had been tagged for capital projects. In addressing FY 2003 revenue shortfalls of $290 million, the Governor and leaders of the teachers union insisted that reserves be used to mitigate the size of spending cuts. The legislature initially held firm, saying that budgets should be trimmed more to offset the revenue shortfall, but finally gave in and agreed to use significant reserves. By the time they were through, spending cuts amounted to just $115 million.
In total, addressing nearly $690 million in shortfalls for FY 2002 and FY 2003, the legislature made only $259 million in spending cuts. In other words, real budget trimming has been used to solve slightly less than one-third of the revenue problem.
When compared to neighboring states California and Nevada, Utah is unquestionably a “financial steward” because Utah has balanced its budget in these lean times without a general tax increase. An Associated Press article reported that California faces a record $38.2 billion budget shortfall and is operating for the first time completely on borrowed money. The state has only enough cash to get through mid-August. Without a new budget by the deadline, the state is unable to legally make on-time payments to schools, community colleges, courts, state suppliers and others.
Governor Gray Davis, who is facing a recall election and was recently named America’s worst Democrat governor by the Wall Street Journal, has proposed a budget plan that includes a mix of service cuts, borrowing and higher taxes to bridge the gap. Republicans say they won’t support new taxes, while Democrats are unwilling to cut enough to balance the budget without new taxes. Because a two-thirds majority is needed to increase taxes, the legislature is at a stand still.
Nevada is proposing large tax increases to fund its ever-expanding government. According to the Nevada Taxpayers Association, Nevada’s Republican Governor Kenny Guinn said he could accept $704 million in new taxes to balance the biennium budget. Democrat legislators are demanding even larger tax hikes. Like California, Nevada needs a two-thirds majority to hike taxes. The legislature is dead-locked in special session.
Meanwhile Governor Guinn, who was recently named America’s worst Republican Governor by the Wall Street Journal, has filed a Writ of Mandamus to force the legislature to violate the Nevada Constitution’s requirement for a 2/3 majority vote before tax increases can be adopted. In 1994 (78%) and again in 1996 (71%), voters overwhelmingly supported the Gibbons Tax Restraint Initiative. Now the governor wants the State Supreme Court to overturn the Constitution – and the will of the pe0ple.
And you thought Utah had budget problems.