by Joseph Coletti
Senior Fellow, Fiscal Studies, John Locke Foundation
Kansas has been criticized since 2012 for cutting taxes irresponsibly, despite a court-ordered increase in education spending. Tax cuts in the Sunflower State may have been larger than circumstances warranted, but state spending played its role. We have contrasted the Kansas experience with North Carolina’s spending reductions in the early stages of tax reform and continued slow spending growth, which have made possible sustained rate reducing tax reforms. North Carolina’s recent policy also provides a distinct improvement from fiscal policy in decade before 2011.
Alaska’s disastrous expectations of a return to high oil prices in recent years left the state making regular withdrawals (totaling $16 billion since 2014) from its savings reserve and since 2016 cutting the Permanent Fund Dividend payment to every Alaskan. Both budget ploys were also necessary because nobody wanted to cut spending on programs.
Newly elected Gov. Mike Dunleavy in December said the state faced another $1.6 billion shortfall this year in the $11.5 billion spending plan left by his predecessor, Bill Walker. Dunleavy campaigned on a promise to restore the statutorily mandated dividend payment, which would total $3,000 per person this year instead of the $1,600 currently budgeted.
After the legislature cut spending in its budget bill, Dunleavy used his line-item veto to eliminate $400 million in spending, including $130 million for the University of Alaska, 40% of its state appropriation (16% of the University’s total budget). He also agreed to keep the dividend at $1,600 for now, though he hopes a special session later this year will provide the $1,400. Overall, he claimed the savings would cut the deficit in half. Public outcry forced the governor and legislators to restore $156 million this month, though Dunleavy has not given up despite a recall effort.
Washington Post columnist Henry Olsen of the Ethics and Public Policy Center says the episode demonstrates the impossibility of “trying to close the federal budget gap through budget-cutting alone, as conservative groups want.” Instead, he says, “the annual $1 trillion federal budget deficit will not be significantly reduced or closed without large tax increases, reductions in spending Republicans value, or both.”
The fact that Alaska has made it as far as it has indicates the limits to Olsen’s pessimism. Bill Walker may have lost the election over the dividend, but a larger dividend is clearly less valued than other programs. It would be better to adjust the formula instead of making ad hoc changes, but even Alaskans are somewhat willing to take less in government benefits than they have been promised. This suggests that entitlement reform may be possible.
The recall effort against Dunleavy is not indicative of anything other than the vehemence with which a small group of people will cling to the status quo. Former Wisconsin Gov. Scott Walker and several state senators were targeted by similar efforts when they took on public unions in that state. They survived, and their reforms have also survived.
If anything, Alaska demonstrates not that spending cuts are impossible but that entitlement cuts are essential and that higher taxes to pay for the current level of federal spending would hit everybody, not just the rich. Spending is indeed the problem for states and for the central government.
North Carolina provides the best example of what is possible when government spends less than it collects. Higher than expected tax revenues can help build savings or be returned to taxpayers. A number of factors helped make this possible, starting with a vibrant economy aided by an improving tax and regulatory environment that provide certainty for businesses. The first step in North Carolina, in Wisconsin, and now in Alaska, has been to recognize the limits of what government can spend on entitlements and other programs. Spending cuts are a better response to fiscal challenges than tax increases.