Governors Burn Surpluses on Tax Cuts Amid Campaigning

Photographer: Joe Raedle/Getty Images

Florida Governor Rick Scott toured the state this month to highlight his proposed $500 million tax cut and a projected $845.7 million budget surplus. Close

Florida Governor Rick Scott toured the state this month to highlight his proposed $500... Read More

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Photographer: Joe Raedle/Getty Images

Florida Governor Rick Scott toured the state this month to highlight his proposed $500 million tax cut and a projected $845.7 million budget surplus.

Florida Governor Rick Scott shows how governors in at least nine states are approaching re-election campaigns next year by touting surpluses and pitching tax cuts, sometimes relying on one-time revenue to fund the breaks.

The 60-year-old Republican toured the state this month to highlight a proposed $500 million decrease in taxes and a projected $845.7 million surplus. State economists attribute most of that to money carried over from last year’s budget.

Revenue topped forecasts in 30 states, partly because wealthy taxpayers shifted income into 2012 to avoid higher federal rates, according to the National Association of State Budget Officers. Some governors seized on the extra money as evidence of fiscal skill. The tax breaks give them material for the campaign trail, even as state-finance analysts warn they’re built on faulty budgeting and could force deep cuts after the elections.

In addition to Scott, Republicans Scott Walker of Wisconsin, John Kasich of Ohio, Paul LePage of Maine, Terry Branstad of Iowa, Sam Brownback of Kansas and Nikki Haley of South Carolina have all trumpeted proposed or already-accomplished tax cuts. Democratic governors Andrew Cuomo of New York and Mark Dayton of Minnesota are also pushing to reduce taxes before facing voters next year.

Apportioning Money

“We’ve cut taxes every year for three years,” Scott told reporters on his five-city “It’s Your Money” tour. Since taking office, Scott has expanded corporate income-tax breaks and reduced property taxes and sales taxes for manufacturing equipment. 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.

“We need to make sure we give it back to the taxpayers,” said Scott.

Democrats accuse the governor of trying to buy votes and failing to fully restore 2011 education cuts. Half the residents in a June poll said Scott didn’t deserve re-election.

“The average Florida family is hoping their kid gets a better education,” said Joshua Karp, a 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 cuts had more material consequences. Her jobless benefits ended last year after Scott and the Republican-led legislature scaled back the aid in 2011.

“They took away the little money I was getting,” she said. “It’s just cruel. I’m still looking for work.”

Unsupportable Strategy

The revenue bump doesn’t indicate a robust 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 stemmed from residents trying to avoid federal tax increases.

“The most recent trends simply cannot continue,” Boyd said. “They’re not supported by any kind of ongoing underlying economic fundamentals.”

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, Boyd said.

Creating Jobs

Personal income-tax revenue in 46 states surged 20 percent in the April to June period compared with last year’s second quarter, according to preliminary data cited by the institute.

Some governors used surpluses to partially restore funding for services such as education after reductions. Several states reduced debt and increased reserves drained thanks to the 18-month recession that ended in June 2009.

In Ohio, Kasich and the Republican-led legislature built up a rainy-day fund and cut taxes by $2.7 billion over three years. Kasich, a former budget panel chairman in the U.S. House of Representatives, pledged to erase levies on income when he ran for governor in 2010. He wants to keep lowering rates.

“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 know as these taxes go down and encourage work and investment, we can do much better.”

Ohio may be overestimating the benefits, as job growth is slowing, Marcy Block, an analyst at New York-based Fitch Ratings, said in a Sept. 10 report. The forgone revenue may “lead to structural imbalances,” she said.

Cuts Accommodated

State budget chief Timothy Keen said the spending plan has accounted for less cash and doesn’t rely on growth that might result from tax reductions.

Walker, LePage and Brownback have each signed bills that trigger tax cuts if revenue rises faster than forecast.

After enacting a two-year budget in June that incorporates almost $1 billion of tax reductions, Walker, 45, is considering more, said Tom Evenson, his spokesman. Last month, the Wisconsin revenue department reported that fiscal 2013 tax collections surpassed projections by $71.5 million.

That was the result of “tough, but prudent, decisions,” the governor, a potential presidential candidate in 2016, said in a statement.

Iowa’s Branstad said in a July e-mail to supporters that his state eliminated a $900 million deficit and instead has a $900 million surplus. He also touted “the largest tax cut in Iowa history,” after covering changes to property taxes with the excess revenue.

Budget Hawks

In addition to Branstad and Walker, Republicans Kasich, Scott, LePage, Brownback, Haley, Susana Martinez of New Mexico and Rick Snyder of Michigan have each credited tax cuts and fiscal discipline for deficit-to-surplus rebounds. Each won major tax changes this year and is up for re-election in 2014.

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 state senator running for governor, said Scott’s rollbacks favor corporations.

“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.

Democratic governors Cuomo and Dayton also floated tax cuts. Both have seen budgets improve after raising rates on top earners.

Cuomo, 55, extended an increase on residents with million-dollar incomes this year to finance targeted tax cuts.

Dayton, 66, has said he hopes to use his surplus to lower business taxes after reducing debt.

A slowdown in collections 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, Rockefeller Institute’s Boyd said in a Sept. 18 report. “State officials should be cautious about using any unanticipated revenue for ongoing spending increases or revenue reductions.”

To contact the reporter on this story: Toluse Olorunnipa in Tallahassee, Florida at tolorunnipa@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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