For true believers in smaller government, states' fiscal woes have silver lining

Posted: Tuesday, September 02, 2003

It looked like the stands at a high school football game. Fans clad in red, hooting for their side. Hundreds of opponents waving banners, chanting, cheering and booing.

But it wasn't a stadium it was the usually reserved, buttoned-up state capitol in Jefferson City, Mo. Lawmakers and Democratic Gov. Bob Holden argued whether to raise the state's taxes or cut programs.

Each sides' supporters wearing red for spending cuts, and white for tax increases packed the state House chambers, offering perhaps the year's noisiest and most colorful example of something that's happening in statehouses around the country.

People who see big government as the problem, the main reason for the nationwide crisis in state finances, believe this is a perfect moment to finally cut back. And, in many places, they're winning the day.

The majority of states facing two choices for getting out of the red this year raise taxes or cut programs have relied more heavily on the latter than the former in crafting a solution. Many have abandoned broad tax hikes completely.

Everyone in the political game recognizes the simple truth that voters don't like taxes. But small-government proponents say this fight isn't about getting elected.

''It's a philosophical conflict,'' says California state Sen. Tom McClintock, a Republican who quotes Abraham Lincoln when he gets warmed up. ''The eternal struggle between these two principles, right and wrong. It's the same spirit that says you work and toil and make bread, and I'll eat it.''

Conservatives are pursuing a vision of government in which new taxes are virtually unthinkable, and solutions to the financial travails facing state governments must be found in winnowing down a bloated system.

They believe government shouldn't try to do so much, and should charge less for what it does accomplish. Americans work hard for what they earn, and the economy works best when they get to spend their money as they please, the thinking goes.

For them, the states' money problems offer a golden opportunity: Weed out unnecessary programs. Do less with less privatize government services like prisons, or scale back on ambitious social services. Above all, cut costs to citizens.

Across a sharp line is just about everyone else: liberals who say the poor are being shortchanged, and others who call themselves moderate, even conservative, who say the reality of government is too complicated for black-and-white stances. The lines are often partisan, but not always.

Already, the results of the debate are showing up in real cuts canceled jury trials in New Hampshire, and fewer state troopers watching Oregon's highways, for example.

There also are changes in line with the true believers' governmental philosophy: Maine is looking to privatize its state-run liquor stores; Connecticut its group homes for the mentally retarded; Florida some prisons and child welfare programs.

In Missouri, the shrink-government group ultimately won the argument that drew the raucous crowd to the capitol in June, later rejecting Holden's budgets.

The governor then said he was forced to make $250 million in cuts.

Their compatriots won or heavily influenced outcomes in California, Colorado, Florida, New Hampshire, Oregon and more, whether cutting spending or just forcing smaller growth.

''There's a struggle in the halls of the legislatures, in the chambers,'' says Georgia state Rep. Nan Grogan Orrock, a Democratic leader. ''I see that in Georgia from some of the Republican leadership. They're almost gleeful 'We're going to have to make cuts.'''

Over the past three years, states saw roughly $200 billion in shortfalls money, most often from taxes, they had expected but that the weakened economy failed to produce.

Arriving at precise, nationwide numbers for state finances can be tricky, but the approximate figures show how the small-government lobby has made gains.

To cover those gaps, states so far raised $20 billion in higher taxes over the past two years, with nearly $4 billion in fees. Meanwhile, states cut $30 billion over the past two years in midyear emergency cuts as their budgets unraveled.

So the clearest numbers yet available show that for every $2.40 raised by new taxes and fees over the past two years, states cut $3 from their spending plans.

Still, taxes and cuts only covered part of the estimated shortfalls. The rest were covered through borrowing from reserve funds and against future payments of the tobacco settlement; accounting maneuvers; and recent help from the federal government.

The victories for the small-government crowd haven't satisfied them. They're still concerned about continued overall growth in state government spending.

The statistics there are endlessly debated. Overall state government budgets, now at some $1.2 trillion, do continue to grow. But only half of that is under direct control of legislatures and governors so-called general funds and they have been cut back in many states, and in others sharply curtailed from the 6 percent growth of the 1990s.

This year, general funds were projected to fall 0.1 percent, the first decline in 20 years; last year, they grew only 0.3 percent, according to the National Association of State Budget Officers.

The National Conference of State Legislatures, however, said this year's spending will rise 1 percent, less than inflation.

When looking for budget solutions, governors and legislators have sometimes defied political stereotypes and made enemies of hard core small-government types in the process.

For instance, Gov. Dirk Kempthorne of Idaho, a Republican who cut taxes dozens of times, lobbied his GOP legislature this winter and won a temporary tax increase. Conservative activists say they're keeping watch against such ''skin-deep'' anti-taxers and vow that their political careers are finished.

''The big villains,'' Stephen Moore calls Kempthorne and other GOP governors who raise taxes. President of the anti-tax, supply-side Club for Growth in Washington, Moore said those governors are ''the ones we have our knives out for.''

Kempthorne scoffs at the threats. It's easy for someone at a think-tank in Washington to write an article demanding cuts. It's a lot tougher to make decisions that involve real people, real problems, he says.

''They can deal in theory,'' Kempthorne says.

''I've cut taxes. But in the worst financial crisis in the state since World War II, I'm going to be a pragmatist. I'm going to make sure the children of Idaho get an education.''

His solution: temporarily raising sales taxes by 1 cent on the dollar, and cigarette taxes by 29 cents a pack.

In the legislatures where the budgets are crafted and debated, even those who share the enthusiasm for smaller government often talk the talk of pragmatism: compromise.

''I'm a Jack Kemp, Reagan-type supply-side tax-cutter, a George W. Bush tax-cut kind of guy,'' said Missouri Senate President Pro Tem Peter Kinder, a Republican who spoke against Holden's taxes at the capitol showdown.

Still, he said, ''I'm not sure it can entirely be done on one side or the other. ... The people expect us to govern. They sent us there to do the people's business and not to carp bitterly at each other.''

The answer, he said, is to pick your fights carefully. He and the GOP legislature agreed to several of Holden's proposals to close business loopholes, a compromise that allowed him to focus on his bigger problem that Missouri's government has grown too fast for its citizens to support.

His statistics: In the past decade, Missouri has seen Medicaid rolls jump from 350,000 to 900,000. The state now has nearly as many employees as neighboring Illinois, which has twice Missouri's population.

''We simply cannot afford all the obligations state government has taken on,'' Kinder says.

What happens next will depend on the economy, and the voters.

An Alabama referendum could offer a clue. Voters are being asked to raise taxes by $1.2 billion; if they say no in September, the budget will be cut.

Some economists say they see signs the nation's economy is reviving. The question is whether that will translate into more tax income for states that will ease the money crisis of the past three years. If not, the dilemma will return: cuts or taxes.

''When times were good, liberals were in control, government expanded greatly,'' said Missouri's GOP House speaker, Catherine Hanaway. ''Now we have a time when the economy is slower, more conservative legislators are in control of the General Assembly, and government will shrink.''

''This is cyclical.''

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