Republican governors across the United States have discovered a new tool to deal with budgets bleeding red ink: Taxes.
Many states have laws that require balanced budgets. So when a slew of Republicans took over statehouses in the Republican onslaught of 2010, they announced both tax and service cuts. The taxes were cut to show they could boost the state’s economy by reducing the tax burden.
That strategy didn’t really work. Kiplinger newsletter reports that “30 states’ budgets remain in the red this year, with a combined shortfall of $40 billion. About 20 of them will still be running deficits — a total of $25 billion — in fiscal 2014.”
There has been some increase in state revenues the last couple of years, but it came not from a policy of cutting taxes, but from our improving national economy — an improvement resulting in large part from President Obama’s insistence on a balanced “tax and cut” approach.
But the increase hasn’t been enough. So states with deficits and mandated balanced budgets, having cut services almost to the point of putting them on life support, need new sources of revenue.
Michigan Republican Gov. Rick Snyder has proposed a major tax increase. Although Michigan’s automotive industry survived (thanks to President Obama), the state, one of the hardest hit by the Great Recession, is far from a complete recovery. And its crumbling roads need immediate attention. Snyder showed considerable courage in touching “the third rail” of taxation: a steep increase on gas pump taxes, from 19 cents to 33 cents per gallon, and increasing license plate fees by 60 percent, according to the AP.
Snyder is not the only governor proposing raising gasoline taxes; Kiplinger says 17 states will raise taxes at the pumps. Conservatives complain that these taxes take money out of the pockets of consumers. But the same conservatives also refuse to raise taxes on the wealthy. And revenue to repair roads and provide essential services must come from somewhere.
Part of this newfound love for taxes comes from the Republican governors’ frenzy early in their administrations to cut taxes on businesses — supposedly to spur growth. But state economic growth has not kept up with even the reduced (after cuts) cost of state services, such as infrastructure, health and education.
Revenue must be found, and Republican governors are realizing it can only be found in taxes. Hence, Snyder’s proposals in Michigan. Gov. Sam Brownback of Kansas wants to keep a “temporary” state sales tax, and Nebraska Gov. Dave Heineman is proposing higher sales taxes. Gov. Bobby Jindal of Louisiana proposed eliminating corporate and personal income taxes (which reminds me of the song “When Will They Ever Learn?”). Now Jindal wants to raise the lost revenue through higher state sales taxes, another consumer-based tax.
Jindal’s proposal is what some Republican governors are calling “tax swaps.” The idea is to swap business and income taxes for consumer taxes. But that avoids the problem — the need to increase revenues enough to deal with in-the-red budgets. And some of these tax swaps rely on federal handouts to the states: a swap of expenses with the same taxpayers footing the bill.
The governors say they are keeping with conservative philosophy by switching taxes from income to consuming. But there’s no real way to predict how much money consumer-based taxes will produce. And if consumption falls, so will revenue.
Joseph Henchman, vice president of the Tax Foundation, a conservative think tank, told The New York Times’ Richard Stevenson, “Everyone agrees we’ll get more growth with consumption taxes. It’s just that some people prioritize fairness.”
Everyone? Really? Many economists argue that raising taxes on consumers will impel them to spend less — not a good thing in a consumer-based economy. And economists note that the wealthy spend a much smaller percentage of their incomes on personal consumption, in effect giving them a tax cut and the middle class and poor a tax increase.
Because sales taxes hit the middle- and low-income taxpayers the hardest, they are generally recognized as “regressive.” The same can be argued about all consumer taxes, including those at the gas pump.
Still, at least some Republicans recognize that their tax cuts alone did not do the job for state economic recovery. The next step is to admit that to maintain vital state services, the needed increase in revenue has only one source. Thankfully, a few Republican governors have come to the realization they must raise taxes.
“States have a rough budget road ahead,” Kiplinger says. Still, the current $40 billion budget gap among 30 states is still an improvement over their red-ink shortfall of $71 billion just two years ago. They can thank Obama’s economic policies for that improvement. Maybe they should think about adopting them as well.
Donna Brazile is a senior Democratic strategist, a political commentator and contributor to CNN and ABC News.