Never Mind Congress The Real Reform Action Is In The States

Overshadowed by the House Republicans' efforts to implement the Contract With America are revolutionary proposals by states and cities that may have a greater impact than what ultimately happens in Congress.

Some 30 states are planning to reduce taxes, while New Jersey, Michigan, and a few others have already begun the process. California, New York, and Massachusetts were leaders during the past 30 years in expanding state spending and regulations. But all now have Republican governors--Pete Wilson in California, George W. Pataki in New York, and William F. Weld in Massachusetts--who are strong advocates of cutting taxes and red tape.

I was a member of the Governor's Task Force on California Tax Reform & Reduction appointed by Wilson in 1994. We suggested, and he endorsed, a 15% across-the-board cut to be phased in over a three-year period in state personal income and bank and corporation tax rates. In New York, after years of growth in taxes, Pataki was recently elected on a platform that pledged to cut state income taxes by 25% during the first four years of his term. Weld has renewed proposals for tax cuts that are expected to be approved in some form by the state legislature. Democratic governors have also heard the voters' message, and some are advocating tax and spending cuts.

FORCED TO WORK. Total state and city government tax revenues are almost as large as the federal government's and have risen at about the same rate since the 1970s. However, part of the growth in state spending has been mandated by federal programs such as Medicaid. This is why governors from both political parties are urging Congress not to impose additional mandates on them.

Local governments are not limiting their reforms to taxes. Massachusetts, Virginia, California, Wisconsin, New Jersey, and other states are seeking radical alterations in the welfare system. The Virginia legislature recently passed a law modeled after one enacted in Massachusetts that forces recipients to work, eliminates benefits to parents who have been on the welfare rolls for two years, and denies aid to children born to mothers already collecting relief.

Some states are also ahead of Congress in cutting regulations and making drastic changes in the tort system. Governor Wilson wants to cap punitive damages in tort suits at three times the direct losses to plaintiffs and encourage litigants to use private arbitration instead of the courts. He also hopes to discourage frivolous suits against defendants who have deep pockets and who might settle rather than go through costly litigation.

California is planning to reduce its onerous regulatory burdens intended to protect the environment. It will propose a constitutional amendment to require a two-thirds vote by the legislature to approve all laws imposing new compliance costs. The state also will require an economic analysis of the benefits and costs of all suggested state environmental regulations.

LIGHTING A FIRE. The Republican mayor of New York, Rudolph W. Giuliani, facing an enormous budget gap, is slashing city spending. Giuliani wants to privatize several city-owned hospitals and cut Medicaid spending and other social services.

These state and city tax and spending cuts are partly responses to the same voter discontent with politicians and government that is lighting a fire under Congress. But local governments are also motivated by a consideration unique to them: growing regional competition to attract business and skilled workers. Computer, electronics, biotechnology, insurance, engineering, scientific research, and other manufacturing and service industries are footloose and don't need to locate near raw materials, ports, or other transportation facilities. They choose where to locate partly on the basis of the tax and regulatory climate.

The California Task Force's proposals for tax reduction were partly motivated by competition from Utah, Oregon, and other Western states with better business climates. Business migration to these states is expected to accelerate if California does not lower its taxation of individuals and businesses and reduce regulatory burdens. Other states are also reexamining how their taxes and regulations measure up relative to neighboring and more distant states competing for the same business.

Competition for people and business in the decentralized spending of a federal system of government helps force local programs to be more responsive than national programs to the wishes and needs of citizens.