TALLAHASSEE, Fla. — Governors in at least nine states are approaching re-election campaigns next year by touting surpluses and pitching tax cuts to voters, sometimes relying on one-time revenue to fund the breaks.
Florida Gov. Rick Scott, a 60-year-old Republican, toured the state this month to highlight his proposed $500 million tax cut and a projected $845.7 million budget surplus. State economists attribute most of that to a one-time windfall.
Revenue has topped forecasts in 30 states this year, partly because wealthy taxpayers shifted their income into 2012 to avoid higher rates, says the National Association of State Budget Officers. Some first-term governors, at least eight of them Republicans, have seized on the extra money as evidence of fiscal skill while devoting the cash to election-year rollbacks.
“We’ve cut taxes every year for three years,” Scott told reporters on his five-city “It’s Your Money” tour. He said Florida had a $3.7 billion deficit when he took over and now has a surplus, with revenue headed for a record next year.
“Now we need to make sure we give it back to the taxpayers,” Scott said.
Democrats accuse the governor of trying to buy votes and failing to fully restore his 2011 education cuts.
“The average Florida family is hoping their kid gets a better education this year,” said Joshua Karp, a state Democratic Party spokesman. “They’re not looking for another big giveaway to special interests.”
For others such as Donna Weaver, an unemployed computer specialist in Miami, Florida’s budget cuts had more material consequences. She said she felt their pinch when her jobless benefits ended last year. Scott and the Republican-led Florida Legislature scaled back the aid in 2011.
The revenue bump reported by dozens of states isn’t an indication of a robust economic rebound, according to analysts such as Donald Boyd, a senior fellow with the Nelson A. Rockefeller Institute of Government in Albany, New York. Boyd said most of the unforeseen revenue has stemmed from moves to avoid federal tax increases that took effect this year.
“The most recent trends simply cannot continue,” Boyd said by telephone. “They’re not supported by any kind of ongoing underlying economic fundamentals. The bigger cause likely was this incentive for accelerating income into 2012.”
Federal tax rates for couples earning more than $450,000 annually rose to 39.6 percent in January from 35 percent last year, after Congress allowed many cuts enacted under President George W. Bush to expire. An increase on capital gains to as much as 23.8 percent also passed. As a result, wealthy residents pushed income into 2012, boosting local receipts, Boyd said.
State revenue from personal-income taxes surged 20 percent in the April to June period compared with last year’s second quarter, according to preliminary data from 46 states cited by the institute. In the three months from January to March, an 18 percent jump in the same category drove an 8.6 percent revenue gain for states, compared with the year-earlier period, it said.
Like Scott, most tax-cutting governors have also used surpluses to partially restore funding for services such as education after reductions in 2011. Tax cuts also may be sought by at least two Democratic governors facing re-election in 2014.
Several states have used their extra cash to reduce debt and increase reserves, which were drained during and after the 18-month recession that ended in June 2009.
In Ohio, first-term Republican Gov. John Kasich and the legislature led by his party relied on a budget surplus to increase that state’s reserves and make changes that reduced taxes by $2.7 billion over three years. Kasich, a former budget panel chairman in the House ,, pledged to erase income levies when he ran for governor in 2010. Last month, he said he wants to keep lowering rates to spur growth.
“Cynics would say we do this because we’re trying to get votes,” Kasich said at an Aug. 30 event near Columbus promoting the cuts. “I’m doing this because I know as these taxes go down and encourage work and investment, we can do much better.”
Ohio may be overestimating the benefits of the reductions, as job growth is slowing, Marcy Block, a financial analyst at New York-based Fitch Ratings, said in a Sept. 10 report. Coupled with cooling employment expansion, the forgone revenue creates a risk that the cuts “could lead to structural imbalances” if income-tax receipts fall short, she said.
State budget chief Timothy Keen described the lower levy rates as fiscally sound and said the spending plan has accounted for the forgone cash. The budget doesn’t rely on future growth that might result from the reductions, Keen said by telephone.
Republican governors Scott Walker of Wisconsin, Paul LePage of Maine and Sam Brownback of Kansas have each signed bills that automatically trigger tax cuts if revenue in their states rises faster than forecast.
After enacting a two-year budget in June that incorporates almost $1 billion of levy reductions, Walker, 45, is considering more cuts, said Tom Evenson, his spokesman. Last month, the Wisconsin revenue department reported that fiscal 2013 tax collections surpassed projections by $71.5 million.
The extra revenue resulted from “tough, but prudent, decisions,” the governor said in a statement.
Walker, a potential presidential candidate in 2016, is among several first-term Republican governors who pitch themselves as worthy of re-election based on fiscal turnarounds. Another is Iowa’s Terry Branstad.
“Not only did we eliminate the $900 million budget deficit, our conservative budgeting practices have given us a $900 million budget surplus,” Branstad, 66, said in an email to supporters as he began his re-election campaign in July. He also touted “the largest tax cut in Iowa history” after the passage of property-levy changes covered by the excess revenue.
In addition to Branstad and Walker, Republican governors Kasich, Scott, LePage, Brownback, Susana Martinez of New Mexico, Nikki Haley of South Carolina and Rick Snyder of Michigan have each credited tax cuts and fiscal discipline for their states’ deficit-to-surplus rebounds. Each won major tax changes this year and is up for re-election in 2014.
In crafting their budgets, they’ve had help from rising equity prices and income-shifting by wealthy residents. Boyd is among state-finance analysts who say it may be difficult to sustain the tax breaks in future years without spending cuts.
Florida’s projected surplus comes from improving sales-tax receipts as well as funds carried over from the prior year, said Amy Baker, director of the state’s economic research office.
Nan Rich, a Democrat and former Florida state senator who is running for governor, said Scott’s tax rollbacks favor corporate interests at the expense of middle-income residents.
“Instead of using those funds to restore the cuts to education and begin to pay for other critical needs that were slashed from the budget during the recession, Rick Scott is playing politics,” Rich, 71, said in a statement.
The Florida Republican Party has used the governor’s latest tax-cut proposal to boost his re-election prospects. Scott, who hasn’t specified which levies he expects to reduce next year, said the proposal would “help families.”
Democratic Governors Andrew Cuomo of New York and Mark Dayton of Minnesota have also floated the idea of cutting taxes before their 2014 re-election bids. Both have seen budgets improve this year after raising rates on top earners.
Cuomo, 55, extended an increase on residents with million- dollar incomes this year to finance targeted tax cuts.
He may seek more reductions for fiscal 2015 in January, according to a person familiar with his thinking who asked not to be identified because the governor hasn’t determined which taxes to cut or by how much. A credit enacted this year will have families with children receiving checks for $350 by October 2014, shortly before Election Day.
Dayton, 66, has said he hopes to use his state’s surplus to lower business taxes after reducing debt.
A slowdown in revenue collections, which economists such as the Rockefeller Institute’s Boyd predict will begin this year, may throw a wrench in plans for election-year tax cuts.
“The ‘bubble’ in income-tax receipts most definitely would be short-lived, and in fact should lead to slower growth” this year, Boyd said in a Sept. 18 report. “State officials should be cautious about using any unanticipated revenue for ongoing spending increases or revenue reductions.”
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