As posted by: Wall Street JournalWidening state budget deficits are causing big headaches for the governors who met with President-elect Barack Obama this week, especially those Republicans who hope to emerge as the new leaders of their party.
In the wake of a dreary election for Republicans, the quest to find their new leaders is on, and the party's governors think they can fill the void. The problem is their states are heading for budget difficulties that may compel the governors to swallow hard and either propose or accept tax increases.
And there is no better way to alienate the base of the Republican Party than to push for, or acquiesce to, tax increases.
"This is a tremendous opportunity to separate the sheep from the goats," said Grover Norquist, president of Americans for Tax Reform. "The guys who turn around and say 'I can't rein in spending, I must raise taxes'...are going to have a hard time."
But inside the states, the line can become a bit blurrier. The collapse of financial markets and the overall fall of the economy are hitting states hard, and, unlike the federal government, most state governments are required to balance their budgets.
That may leave Republican governors torn between a party base that sees tax increases as unforgivable and a constituency that will tolerate only so many cuts to their services.
The problem is particularly sensitive for a group of governors who are looked upon as potential leaders of their party in the wake of Sen. John McCain's loss in the presidential campaign, including Charlie Crist of Florida, Tim Pawlenty of Minnesota, Bobby Jindal of Louisiana and Mark Sanford of South Carolina.
Some of the governors hoping to lead the opposition party vied for help from Mr. Obama as they met with him in Philadelphia Tuesday. Governors from both parties urged the president-elect to pass a stimulus plan with expanded aid to the states to lessen the blow of coming budget cuts.
Among the states led by Republicans, Florida may have the biggest headache. Gov. Crist faces a $1.7 billion mid-fiscal-year shortfall, according to the Center on Budget and Policy Priorities. Meanwhile, tax revenue in the state, which doesn't have an income tax, plunged 8.2% in the quarter ended in September from a year earlier as sales took a hit, according to the Nelson A. Rockefeller Institute of Government. Seeking to balance the budget, Gov. Crist has said he would consider a cigarette-tax increase of 50 cents a pack.
A similar situation is playing out in Mississippi, where Gov. Haley Barbour, widely viewed as a star among Republicans, proposed a 24-cent-a-pack cigarette-tax increase and a host of other tobacco-related fees. The combined fees, if implemented, are projected to create $80 million in revenue for a state with a roughly $24 million midyear shortfall.
"This governor sees tobacco taxes as more of a health-care-policy issue than a budget-policy issue," said Buddy Bynum, Gov. Barbour's spokesman. Mr. Bynum also pointed out that Gov. Barbour hopes to propose tax cuts, which would offset the new tobacco taxes, during his term.
Minnesota Gov. Pawlenty, who faced a $935 million budget gap for the current fiscal year, will likely face another shortfall as tax revenue was flat in the third quarter. Louisiana Gov. Jindal, while better off than his counterparts this year, is expected to encounter problems next fiscal year. During the third quarter, income-tax revenue fell 12% and corporate-income-tax revenue plummeted 35.7%. Rising sales taxes helped make up the shortfall, so total tax revenue fell only 1% in the quarter.
South Carolina's Gov. Sanford is resisting the urge to propose or accept raising taxes. Faced with a shortfall, Gov. Sanford reconvened the state Legislature in October, and it made $488 million in targeted budget cuts.
Gov. Sanford, unlike most of his colleagues, speaks out against any federal bailouts, including a fiscal stimulus bill that is likely to include state aid. "When times go south you cut spending," Gov. Sanford said. "That's what families do, that's what businesses do, and I don't think the government should be exempt from that process."
But in the midst of the largest financial crisis in decades, Gov. Sanford said he wouldn't be surprised if the Republican governors who do raise taxes get a pass with voters. "There's enough confusion and, frankly, fear out there with regard to what's happening to the economy...that they're really not going to watch some fee or some relatively incidental tax" that rises, he said.
Still, the governors' reactions will be closely watched by tax activists such as Mr. Norquist, who is notifying the governors that he plans to publish a review of their performance, based on factors such as spending cuts and the size of the state payroll, in the next year and a half.
And with plenty of the governors being considered potential presidential candidates for 2012, any tax increases they approve or suggest now are all but guaranteed to resurface as subjects of debate.
"We are still the party of cutting taxes and economic growth," said Scott Reed, a Republican political consultant. "I think [raising taxes] would be a tremendous noose around their neck."
