A Slowdown Could Hit Gop Governors Where They Live

For years, Virginia has been sitting pretty. Because of a high-tech boom that sent tax revenues soaring, it has been able to cut taxes while significantly boosting spending for roads, schools, law enforcement, and health care. But it's becoming increasingly clear to Governor Jim Gilmore and his bean counters that the good times aren't going to last. With the national economy slowing and tech companies stumbling, Republican Gilmore is agonizing over a series of tough fiscal decisions for 2001. Unless he finds millions in cost savings to balance the budget, the centerpiece of his 1997 campaign--eliminating the property tax on automobiles--will be delayed. "The economy is slowing, and you have to make adjustments," he says.

Gilmore isn't the only one bracing for a fiscal crunch. All across the country, Fed Chairman Alan Greenspan's "soft landing" strategy is creating crash landings for state budgets. Until recently, states have been rolling in dough, with revenues outpacing budget projections by up to 3%, says Ray Scheppach, executive director of the National Governors' Assn. But this year, revenues are coming in at more than 1% below estimates. Already, 10 states are being forced to slash current-year spending to head off deficits. "We're moving into a period when governors are going to be squeezed," Scheppach says.

LOST REVENUES. What's going wrong? Softer corporate profits, a big dip in stock-option redemption, and sales taxes lost to Net commerce are causing revenues to stagnate. At the same time, unanticipated expenses are exploding. The annual growth rate in Medicaid spending has tripled from 5% to about 15%. And expenditures will rise even more if the slowdown forces more people to apply for government benefits.

The slowdown has political as well as fiscal consequences. It poses particular risks for the nation's 29 Republican governors, who captured a majority of state capitals in 1994. Booming tax receipts have allowed them to give voters both the tax cuts they want and the increased services they demand. Indeed, state appropriations increased an average of 6.1% in each of the past three years--nearly double the growth rate of tax revenues and about twice the growth rate of the federal budget. Among the big spenders: Texas Governor George W. Bush, who has presided over budget increase of more than 30% since he took office in 1995. In addition, 31 states reduced taxes by a total of $16.4 billion in the past two years.

Now, however, these popular GOP leaders can't avoid angering some constituents as the softening economy forces hard choices. With 24 of their 29 governorships up for grabs in the next two years, budget cuts could cost them politically. In contrast, only 12 of the 19 Democratic governors face election in 2002.

The GOP strategy for minimizing the damage is to stick to its tax-cut plans as much as possible--even if it means trimming budgets. Pennsylvania's Tom Ridge, for instance, promises to "set priorities and keep spending down" so he can afford a seventh consecutive year of tax relief. Idaho's Dirk Kempthorne is taking a neo-Keynesian approach: pump-priming the lagging economy in parts of his state by proposing rural tax credits. While the state is still running a surplus, "it's time to take care of things on the to-do list," Kempthorne argues.

But even if Republican governors manage to keep voters happy with tax cuts, a souring economy could hurt them. The reason: When slumps hit, voters almost always blame the guys in power. "The economy is important when it's bad," warns Governor Gilmore, the incoming chair of the Republican Governors Assn. The challenge for the GOP will be to maintain its grip on state capitals if the good times roll away.

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