- What will the states do with their overflowing coffers? During the revenue boom of the 1990s, states allowed their budgets to bloat as they expanded programs such as Medicaid to unsustainable levels. When the recession hit in 2001 and revenues stagnated, state officials moaned that they were innocent victims of a fiscal crisis. They responded by hiking taxes and clamoring for more aid from Washington.
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Otherwise sensible policymakers [...] apparently think that there is no harm in allowing spending to rise rapidly during booms, as long as tax rates aren't increased. That is not correct: Every dollar used for budget expansion is a dollar sucked out of the private economy and not available for investment and job creation. The cost to California and other high-tax states of using rising revenues for added spending is that crucially needed reforms to improve tax competitiveness are not being made.
Some governors are using current budget surpluses to cut taxes. Unfortunately, most cuts this year are gimmicks – such as rebates and narrow credits – rather than reductions to tax rates. State policymakers seem to have forgotten that the purpose of tax cuts is to promote economic growth, not to buy off special-interest constituencies. Gov. Jon Huntsman of Utah is an exception: He is calling for a cut to the state's top income-tax rate to "send a signal about our commitment to long-term competitiveness."
Flush With Revenue, States Consider Tax Cuts, New Spending
Fiscal conditions are improving in most states, as revenues rebound from the slump earlier this decade. From Stateline.org, here's a brief roundup of new tax cuts and spending proposals states are considering. UPDATE: Cato's Chris Edwards writes in National Review that it's time for states to cut corporate and individual income taxes: