Good Ideas from Other States: #1 Reduce Spending

by Wesley Fox Over the last two years, many states have faced large budget shortfalls due to declines in revenue and continued spending at unaffordable rates. Some have dramatically cutback spending to balance their budgets, while others have raised taxes. The CATO Institute’s Fiscal Policy Report Card provides an excellent assessment of the responses of U.S. governors...

by Wesley Fox

Over the last two years, many states have faced large budget shortfalls due to declines in revenue and continued spending at unaffordable rates. Some have dramatically cutback spending to balance their budgets, while others have raised taxes.

The CATO Institute’s Fiscal Policy Report Card provides an excellent assessment of the responses of U.S. governors to the recession and subsequent budget problems. The examples below highlight several governors that scored well in the CATO Report Card.

Despite the large budget gaps faced by most states, a number of governors managed to balance their budgets without raising taxes.

• Governor Bobby Jindal has focused on reducing government spending in Louisiana. In 2008, the state dealt with a major drop in federal aid as well as declining revenues. When Gov. Jindal first entered office (2008/09), the state budget was $36.3 billion.  He worked to decrease total spending by 33 percent to $24.2 billion in fiscal year 2010/11, including reducing general fund spending by 12 percent.   Gov. Jindal used pre-Katrina spending levels as a baseline and cut spending across the board.  He also consolidated agency operations and closed satellite offices for several departments.

• In Minnesota, Governor Tim Pawlenty kept government spending under control since taking office in 2003.  At the beginning of the recession in 2008, Minnesota’s general fund spending was $17 billion. As the recession took hold, Gov. Pawlenty worked to cut general fund spending by 14 percent down to $14.7 billion in 2010, with cuts in numerous areas including capital projects and local aid.

• Governor Mark Sanford of South Carolina cut spending by 26 percent between 2008 and 2010.  The cuts reversed years of unimpeded spending growth. State spending increased by over 40 percent between 2003 and 2008.  Gov. Sanford vetoed numerous budget proposals during this period but the legislature had the votes to override his veto and successfully pushed through their own budget. Gov. Sanford’s executive budget for 2010 reduces state spending back to 2005 levels. Governor Sanford also proposed a limit on spending growth based on population increase plus inflation.

The spending cuts in the above mentioned states were large but did not require draconian reductions in government services. In fact, the cuts amounted to bringing spending back to 2005 levels.

Louisiana, Minnesota, and South Carolina also have not raised taxes in the last two years (Louisiana actually cut taxes in 2008). Although all three still face budget shortfalls going forward, they are no greater than those faced by states that decided to raise taxes. States such as California, New York, Colorado, and Arizona have raised taxes in recent years and still face enormous budget shortfalls for 2011 and 2012.  Raising taxes does not necessarily solve budget problems.

To balance the budget, reductions in spending is a sound approach to balancing the budget and ensuring a state remains economically competitive. In many cases, spending cuts do not harm core government services but merely reverse the reckless spending habits of the years prior to the stock market collapse.

Illinois should reduce its spending as much as possible before considering any tax increase. Governor Quinn should go back to the drawing board and implement more reductions before resorting to tax hikes to solve the state’s fiscal crisis. Check out the Institute’s Budget Solutions 2011, which balances the budget without a tax increase.  Also check out Putting the “Laboratory of the States” to Work in Illinois.