When Republican businessman Larry Hogan scored a stunning win in Maryland’s gubernatorial race in November, he seemed to open the latest chapter in his party’s longstanding strategy of capturing governorships with a strong anti-tax message.
A handful of conservative governors, including Sam Brownback of Kansas and Bobby Jindal of Louisiana have for years promoted supply-side tax cuts as an elixir for the economy -- one that can actually increase revenues. .
Hogan promised to cut spending and reduce many of the taxes and fees that increased under Democratic Gov. Martin. Hogan rode that theme to a surprising 54 percent to 45 percent victory over Lt. Gov. Anthony Brown, who was O’Malley’s handpicked successor.
Hogan, 58, is just the second Republican in over four decades to be elected to Maryland's highest office. Even before he was sworn in Wednesday, Hogan was confronted with state budget news that could sorely test his tax-reduction pledge – including more than $1 billion in projected deficits over the next two years.
“It’s a tough situation to be in and it’s even harder if you start off by taking taxes off the table,” said Donald F. Kettl, dean of the school of public policy at the University of Maryland. “It’s harder yet if you decide you’re going to try to cut taxes.”
Hogan’s dilemma is increasingly common for GOP politicians at the state and federal level as they try to reconcile their ideological bents and campaign promises with balance sheet realities. Though the economy has been bouncing back, many state governments are still straining to cover basic programs, road and bridge fixes, and shortfalls in employee retirement programs.
A recent report by the National Association of State Budget Officers shows moderate growth and state budget stability in fiscal 2015, with general fund spending and revenue projected to increase for the fifth consecutive year, based on the states’ enacted budgets.
“States are in a better position than a few years ago, but as the economy continues along [its] slow growth, fiscal challenges are likely to persist from rising spending demands and limited gains in revenue collections,” the report states.
In some cases, GOP governors with a tax and spending cut platform have had to reverse themselves and raise taxes due to large revenue shortfalls. Gov. Brownback, who rose to power promising to cut taxes, shrink the size of government and spur economic growth, last Friday proposed closing a massive budget shortfall by boosting some sales taxes and scaling back his plan to gradually reduce the state income tax.
Certain he could spur his state’s economy, create jobs and provide a model for other Republican governors, Brownback pushed a major tax overhaul through the state legislature in 2012. It included a 25-percent reduction in the top income tax rate and tax cuts on various types of income.
For months before his reelection last fall, Brownback fended off state reports and analyses showing that his supply-side tax cut strategy was cutting into the flow of state tax revenues and driving up the deficit. For instance, state officials anticipated collecting $651 million from personal income tax in April and May, but received only $369 million with little time left in the state’s fiscal year.
Last week, a chastened Brownback proposed a slowdown in income tax cuts — plus major tax increases on tobacco and liquor — as part of fixing a budget shortfall projected at $648 million for the next fiscal year. The proposal is similar to one from his Democratic opponent last fall.
“Brownback was really leading the national charge on how cutting taxes could grow the state’s economy, that if you cut taxes more than your neighboring states, you could steal jobs,” said Kettl of the University of Maryland. “But the revenues haven’t arrived, the economic development hasn’t either, and the kinds of things a state can invest in to be able to grow jobs, especially in terms of research and education and transportation, end up taking it on the chin.”
Another Republican governor now looking at a tax increase is Rick Snyder of Michigan. He urged voters Tuesday to approve an increase in the sales tax in a referendum to finance highway and bridge repairs. In his fifth annual State of the State address, he backed a plan to raise the sales tax from six percent to seven percent.
A larger tax package would pour another $1.2 billion a year into roads and other infrastructure, and another $300 million a year into school construction. “What I need you to do is vote yes,” Snyder said in his speech. “Vote yes so we can have safer roads. Vote yes, so we can get rid of those crumbling bridges and crumbling roads. Vote yes so we can have stronger schools and local governments.”
Meanwhile, multimillionaire Bruce Rauner, who pledged to shake up Illinois and put its troubled finances in order, recently took office with major headaches. Shortly after his election, a judge rejected a 2013 plan for overhauling the state’s underfunded pension systems. Then an income tax increase that Democrats approved nearly four years ago was permitted to partly expire on January 1st.
That left the state with about $2 billion less in revenue for this fiscal year to pay its bills, The New York Times reported. Moody’s has downgraded the state five times in as many years and given it the lowest credit rating among the 50 states.
Laurence Msall, president of the Civic Federation, a nonpartisan research organization, told The Times the worse thing state officials could do was continue to careen from crisis to crisis. Rauner, he added, must face up to hard truths in trying to find a way out of the mess. That might mean a tax increase.
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