Shortly after Barack Obama won reelection in November, New Jersey governor Chris Christie pointed out that Republicans cloudy political prospects had a bright silver lining. One of the reasons you have 30 Republican governors in America, and why were the only organization to add Republican strength, Christie said, is because people see us getting things done. Christies stance countered most of the elite postelection commentary, which gleefully pronounced the Republican Partys political irrelevance. But the governor was right. Since Obama first took office in 2008, Republicans have picked up a net nine governorships, bringing their total to 30 states, which hold nearly 184 million Americans. In 24 of those states, containing 157 million Americans, Republicans also control the legislatures. Democrats boast similar power in just 12 states, with a population of 100 million. Even Republicans unimpressive national showing last November didnt reverse their state-level momentum.
The next-wave Republican governors have ignored proclamations that President Obamas victories have vaporized fiscal conservatism and opened a new era of American big government. At a time when Washington policymakers seem paralyzed by our toughest problems, these state-level revolutionaries have restrained government growth and radically reformed local tax codes. Theyve made their states friendlier to business, reshaped government-employee pension systems to reduce state debt, and restrained the power of public-sector unions over state and local budgets. Some have even proposed eliminating income and corporate taxes.
Christie, whose stock has risen in New Jersey as he heads into a reelection battle this year, believes that the next national leadership of the Republican Party will emerge from the ranks of its effective governors. I dont think this is a core philosophical examination we have to go through, he has observed. What this is about is doing our jobs.
Few observers predicted this Republican resurgence back in 2008, when elections not only handed the Democrats the White House and Congress but also cemented their control of 29 governors mansions. During the subsequent recession, these governors faced enormous budget challenges. State tax revenues plunged in 2009 and again in 2010, bottoming out at $702 billion—a scary 10 percent drop in two years, according to U.S. Census data. In some states, Democratic governors tried to bridge the resulting budget gaps with big tax increases. In fiscal year 2009 alone, the states as a whole raised taxes by nearly $29 billion, the National Conference of State Legislatures reports—the largest single-year increase on record. It included some $10 billion in personal income taxes, $6 billion in sales taxes, and $1.3 billion in corporate taxes. Despite all this extra revenue, states still needed federal stimulus funds to balance their budgets.
Even as the country seemed to lurch leftward, however, state voters began to revolt against the tax increases. Both gubernatorial elections that took place in late 2009—in Virginia and New Jersey—flipped control from Democrats to Republicans. In New Jersey, Christie defeated Democratic incumbent Jon Corzine with a platform that rejected new taxes. Over the previous eight years, Corzine and his Democratic predecessor Jim McGreevey had raised taxes by more than $5 billion. McGreevey boosted taxes and fees $3.6 billion between 2002 and 2004 alone, raising everything from income taxes to levies on home sales. Corzine followed in 2006 with his own $1.1 billion sales-tax hike. Three years later, he slapped a temporary income-tax surcharge on households making more than $400,000 a year, part of another proposed $1 billion in new taxes. But actual tax collections imploded, leaving Christie with a $4 billion budget deficit when he took office in 2010.
Christie ran enormous political risks in trying to shrink that deficit. Despite discontent over the high taxes, polls showed that voters wanted higher levies on the rich, so that the state could continue a popular program of property-tax rebates for homeowners. And though the voters favored winning concessions from government workers, they also wanted the state to keep subsidizing public schools richly. Christie disagreed. He chose not to renew the surcharge on high earners and slashed aid to municipalities. He also reduced the property-tax rebates; after all, property taxes are imposed by localities, so the rebates amounted to a state subsidy that let cities and towns avoid making tough budget decisions. When homeowners complained, Christie urged them to vote against the expensive municipal and school budgets that were driving their ever-rising property taxes. Voters responded, defeating nearly 60 percent of the school budgets proposed in 2010. Christies reforms slashed state spending by nearly 9 percent and balanced the state budget without new taxes.
Christie then pressed the legislature to pass reforms that restrained municipal spending, including a cap on annual property-tax increases. He also signed off on roughly $347 million in business tax cuts, though he has yet to find the revenues to make good on his pledge to lower Jerseys income tax.
Christies favorability rating was just 44 percent after his first budget passed, but as Jerseyans watched his strategy play out, his popularity grew. Even before his effective and sympathetic response to Superstorm Sandy, more than 50 percent of voters approved of the job he was doing; since then, his popularity has soared. New Jersey business executives, whose confidence in the state had plummeted, have begun to reconsider; about six in ten said in a recent survey that Jersey had improved in its attitude toward businesses over the last three years, while 57 percent believed that it had gotten better at attracting new investment. The number of executives saying that New Jersey is a good place to do business has doubled. Despite the challenges that Sandy presents for our economy, I will not let New Jersey go back to our old ways of wasteful spending and rising taxes, Christie recently announced. We will deal with our problems, but we will continue to do so by protecting the hard-earned money of all New Jerseyans first and foremost.
A year after Christies victory came the 2010 elections, when 26 governorships were up for grabs. Republicans wrested 11 of them from Democrats and lost only five, an impressive tally. The party added North Carolina last November, reaching its current total of 30 governorships.
Perhaps the most ambitious of the 2010 crop of reform governors is Michigans Rick Snyder, a former venture capitalist with no previous experience in office. Snyder initially received less national attention than Christie or Wisconsins Scott Walker, whose battle with government unions grabbed headlines throughout 2011. Perhaps Snyders post-partisan image was what kept him off the national presss radar for so long: he ran as a wonk who would use his business acumen to fix the states finances.
In his first budget, Snyder sought to close a $1.5 billion deficit while pushing—successfully, as it turned out—to get rid of the hated Michigan Business Tax. The MBT didnt just tax businesses profits, as most corporate taxes do; it taxed their revenues as well, meaning that firms had to pay even when they werent making money. Politicians and policy experts in Michigan had long acknowledged that the MBT was one of the nations worst corporate taxes and that it drove away business. But it brought the state $1.7 billion in yearly revenue that no previous governor had wanted to forgo.
Snyders tax-reform plan was audacious. To make up for the lost MBT revenues, he proposed a flat corporate levy; jettisoning $400 million in targeted corporate tax credits, which had tried to keep particular companies in the state; and (most controversially) taxing the pensions of all Michigan residents. Michigan, Snyder observed, was one of only three states that exempted pensions from income tax. The anomaly had originated in the mid-sixties, when state pols and public-sector unions reached a deal to exclude government pensions from taxes and public anger over the favoritism led to a broadened exemption. Snyders call to tax pensions understandably upset retirees and government-worker groups, who threatened to try to recall the governor. But he persisted, and the recall idea fizzled. The Michigan legislature eventually agreed with him and reshaped the states tax code. The new arrangement moved Michigans corporate levy from next-to-worst in the Tax Foundations national rankings to 18th best. The Wicked Witch is done, Snyder said.
Nor was that the end of Snyders reform drive. Last year, he lowered Michigans personal income-tax rate. And now hes seeking to eliminate the states so-called personal property tax, which is actually an outdated tax on business equipment. Snyders changes are unshackling the state from its obsolete economic past and positioning it for new prosperity, noted the Detroit News.
Other members of the 2010 class of Republican governors share Snyders passion for tax reform that attracts businesses. Pennsylvanias Tom Corbett quickly took aim at his states Capital Stock and Franchise Tax, a charge on business assets. Pennsylvania already has a corporate income tax, which means that firms face double taxation—a big reason that the states business environment has won a reputation as one of the countrys harshest. Calling the levy a job-killer, Corbett reduced it by 40 percent and wants to end it entirely once the states economy rebounds. To balance his first budget without new taxes, Corbett cut spending by 3 percent from the previous year. When residents grumbled about cutbacks to local education grants, he took a page out of New Jerseys playbook and signed a law allowing Pennsylvania voters to approve or veto tax increases proposed by school boards.
In Maine, former businessman Paul LePage, also elected governor in 2010, has worked to reform the tax code in a state with one of Americas heaviest tax burdens—and highest poverty rates. During his first year in office, LePage, who grew up poor and even lived on the streets for two years as a runaway, chopped Maines top income-tax rate from 8.5 percent to 7.9 percent, cut business taxes, and got rid of income taxes entirely for 70,000 low-income families. His most recent tax legislation slices the top income-tax rate to 4 percent in years when Maine runs a budget surplus. To make up for the lost revenue, he has reformed the pension system for public employees and placed a five-year limit on welfare benefits. In discussing the welfare reform, the outspoken governor startled incredulous voters by claiming that Maine had more people on welfare than people paying income taxes—which turned out to be true. His budget, LePage argued, sends the message that work and independence are what is expected of everyone in Maine.
Florida governor Rick Scott—formerly the chief executive of Columbia/HCA, the largest for-profit health-care firm in America—arrived in office in early 2011 with an ambitious agenda to make his state more attractive to outside investment. Scotts predecessor, Republican Charlie Crist, had raised cigarette taxes and fees on government services by a combined $2 billion in 2009. So far, Scott has raised the exemption on income subject to the corporate tax, freeing some 12,000 small firms from it. He wants to exempt more firms each year and, in time, eliminate the charge entirely. Scott has held state spending flat over the two years that hes been in office, a feat that has enabled him to make the tax cuts and also to lighten Floridas long-term debt by $1.5 billion.
Can Governor Snyder Save the Motor City from Itself?
In 2011, Michigan governor Rick Snyder signed a controversial bill that allowed emergency financial managers appointed by the state to run struggling cities and schools. It also gave these managers the power to terminate existing contracts with public-sector unions. The idea of using state-level emergency managers to rescue troubled local governments wasnt new in Michigan: Detroits public schools had been under such management since 2008, and emergency managers had run the cities of Flint, Pontiac, and Benton Harbor at various points over the previous ten years. But the new law painted a target on Detroit, which was running a $327 million deficit and had $14 billion in long-term debt. Snyder and the state were sending a tough message to the government of what might be Americas most troubled city: reform your finances, or well do it for you.
The legislation met immediate resistance from the unions and their backers, who claimed that it imposed financial martial law. They collected enough signatures to submit the law to a public referendum in November 2012; it was voted down, 52 percent to 48 percent. Yet the election also brought good news for Snyder, as voters rejected a separate pro-union ballot initiative: a state constitutional amendment that would have guaranteed collective bargaining as a right for public and private employees. Snyder said that he had urged the unions not to overreach by pushing the proposal, but they demanded the vote anyway.
Snyder seems to have decided that the failure of that initiative gave him the political capital necessary to proceed with measures that the unions didnt like. One of these was a right-to-work law allowing employees to opt out of joining unions. Merely the possibility of such a laws passing garnered national attention, since Michigan—the state that birthed the United Auto Workers union—is the fifth most unionized state in America, with 18.3 percent of its workforce belonging to unions. During the state senates vote on the bill, eight protesters were arrested for trying to rush the floor. Outside, union protesters pulled down large canvas tents belonging to the Michigan chapter of the conservative organization Americans for Prosperity, trapping volunteers underneath. This legislation will return us to the sharecropping days of the Deep South, said Detroit-area state senator Virgil Smith. Snyder signed the law in December 2012.
In the same month, he signed a new emergency-manager law, which took effect on March 1. (The law was written in a way that makes it exempt from voter referenda.) Also on March 1, Snyder declared that Detroit was in a financial emergency, which meant that the state could take over the citys finances. His detractors howled. In a statement as hyperbolic as it was alliterative, the Reverend D. Alexander Bullock, president of the Detroit chapter of the Rainbow Push Coalition, called Snyders edict the death of democracy in Detroit. The unions werent happy, either. Todays announcement by Governor Snyder recommending an emergency manager does a disservice to every Detroit citizen, read a statement by the AFL-CIO. It will lead to cuts in vital services, which will benefit out-of-town creditors and make our communities less livable.
One person who wasnt dyspeptic was Detroit mayor Dave Bing, who himself has gotten tough with city employees, implementing job cuts, pay cuts, and furloughs. Bing has announced that hell work with the new manager. We are in an environment, I think, of entitlement, Bing told CNN late last year. Weve got a lot of people who are city workers, who for years and years—20, 30 years—think theyre entitled to a job and all that comes with it.
These fiscal moves drew little national attention, though thats unlikely to continue as Republican governors grow even bolder, aiming for simpler tax systems with lower rates and fewer exemptions. Some want to end the income and corporate taxes entirely, citing research showing that those taxes are the most economically harmful because they target productivity and investment, discouraging both. Studies by the Organisation for Economic Co-operation and Development have determined that consumption and property taxes, by contrast, raise revenues without becoming such a productivity drag. One study using OECD data suggests that every 1 percent shift in tax revenue from an income to a consumption tax can produce as much as 1 percentage point in extra GDP growth.
So Nebraskas Dave Heineman has proposed replacing the income tax, which brings in some $1.6 billion in revenue, with sales-tax money. Nebraska collects $2.4 billion in sales tax already but exempts certain products and industries, forgoing as much as $5 billion; Heineman would eliminate many of those exemptions. Hes asked the legislature to study the impact of his proposal before proceeding. Louisianas Bobby Jindal also wants to end the income tax—continuing a movement that he started in 2008, when he repealed $359 million in income-tax increases that Louisiana had passed six years earlier, arguing that the higher levies were destroying jobs. Jindals current push would mean $3.3 billion less for the state in annual tax revenue, which the governor thinks could be made up partly by hiking the sales tax and applying it to some of the nearly 500 products and services currently not subject to it. (Hes also counting on some economic growth.) Jindal, who was elected governor in 2007 and reelected in 2011, is exploring ways to lessen the impact of a sales-tax hike on lower-income Louisianans, who suffer disproportionately from the bite of such taxes. One of his ideas: excluding basic products, such as groceries, from the tax.
Like Jindal, Kansas governor Sam Brownback is pushing to extend a tax-reform program. Brownback roared into office in 2011 proposing to lower income-tax rates and to regain the lost revenue by capping some popular tax expenditures, like the mortgage-interest deduction. Republicans in the state legislature, balking at ending the popular items, passed a tax-cut package without them, lowering the states income-tax rate from 6.45 percent to 4.9 percent. The governor said early on, . . . Go bold. And we did, said Mike ONeal, Speaker of the Kansas House of Representatives. Brownback paid for the tax cut in part by keeping state spending flat and by using increased revenues from a modest upturn in the state economy. Hes now hoping to end enough tax-code deductions and loopholes to save Kansas more than $1 billion in revenue.
The Republican governors tax-reform efforts contrast starkly with Democratic policy not only in Washington but at the state level, too. As a whole, American states have cut taxes over the last three years. But some of the biggest states have done just the opposite, massively increasing taxes, and Democrats have been responsible.
In January 2011, for example, heavily indebted Illinois, struggling unsuccessfully with large budget deficits and a growing backlog of unpaid bills, was careening toward bankruptcy, in the words of Governor Pat Quinn, a Democrat. With little debate, and haunted by Wall Street warnings that Illinois would soon be unable to borrow in municipal markets, the state passed nearly $7 billion in new corporate and individual taxes—a boost of nearly one-third over the previous years tax-and-fee haul. But almost half of the new revenue was used to pay the higher retirement costs of government workers, according to an estimate by Chicagos Civic Federation, while rising spending soaked up much of the rest. Because the tax hike came without fundamental spending reform, Illinois budget situation improved only marginally. Early this year, Standard and Poors, noting unpaid bills, downgraded Illinois investment rating, so that it now resides with Californias at the bottom of the companys state rankings.
Or consider the victory that Californias Democratic governor, Jerry Brown, won last November when he got voters to approve the equivalent of almost $7 billion in new taxes to ease the states long-term budget woes. Like Illinois, the Golden State has done little to restrain rising costs, including for government workers retirements. Pensions will consume much of the tax increase, say critics like David Crane, a Silicon Valley Democrat and former member of the board of CalSTRS, the states pension fund for teachers. Still more recently, Massachusetts governor Deval Patrick has called for $1.9 billion in new taxes.
Some Democratic governors havent hesitated to use budgetary sleight-of-hand to raise taxes while claiming that they werent. New Yorks Andrew Cuomo, for instance, asserted earlier this year that the state was enacting no new taxes, but he has proposed extending two temporary increases, raising an extra $355 million annually for four years. Back in 2011, Cuomo executed a similar maneuver, extending temporary income-tax surcharges on the wealthy through 2014 to bring in $2.5 billion annually.
The power to raise revenues isnt the only way that governors can influence their states economies. Another is labor relations—and here, the divide between Republicans and Democrats is even starker.
Todays struggle between unions and GOP governors started quietly, almost without notice, nearly a decade ago. In 2005, newly elected Indiana governor Mitch Daniels (who left office this past January) sought to narrow his states $700 million budget deficit by making the government more effective and less expensive. Fresh from his tenure as George W. Bushs first-term budget director, Daniels concocted about 70 reforms, from eliminating departments to health savings accounts for state workers. He soon determined, though, that the biggest impediments to change were the states contracts with its workers. The agreements were so specific and dense that, under their stipulations, we could barely move a photocopier without union permission, Daniels wrote later. As for paying the best workers more, moving the worst workers out, reorganizing departments, or outsourcing services to private companies, that was simply impossible. The contracts existed only because of a 1989 executive order by Governor Evan Bayh that had given government workers the right to bargain collectively. With a stroke of his pen, Daniels rescinded the order, ending the collective bargaining arrangement—and the contracts.
Danielss bold move barely registered in the national news. But a few years later, when government revenues shrank all over the country in the wake of the economic downturn, it became impossible to ignore the high costs of public employees wages and benefits, and the nations mood changed dramatically. Chris Christie made control of those costs a central issue of his 2009 campaign. To highlight the problem, he even declined to seek endorsements from government unions. Once he became governor, he reformed a binding arbitration system that had regularly awarded substantial pay boosts to local government workers. He also collaborated with the Democratic-controlled legislature to reduce the states unfunded pension liabilities—among the nations worst—and require greater health-care contributions from government employees. Christies innovations help explain why 54 percent of business executives now rate New Jersey as generally better than other states in controlling government costs, compared with just 14 percent saying that back in 2010.
Wisconsins Scott Walker said that he had less Christie than Daniels in mind when, in early 2011, he introduced an innocuously titled budget-repair bill in the state legislature. Walker was looking at a two-year budget hole of $3 billion to $4 billion, despite $3 billion in new taxes imposed by his predecessor, Democrat Jim Doyle. Believing that inflexible union contracts would make it tough for him to balance his budget without stillhigher taxes, Walker proposed ending many government workers right to bargain collectively for benefits. The plan ignited union protests in Madison that became a national story.
But once the legislature passed Walkers reforms and they began to take effect, the unions stranglehold on Wisconsin government budgets became strikingly clear. Voters now learned, in one powerful example, that union bargaining had forced school districts to buy teachers health insurance at uncompetitive rates from a firm associated with the teachers union. No longer required to deal with the union, districts quickly dropped the insurer or forced it to bid competitively. Within months, two dozen districts reported saving approximately $16 million on health insurance. Even Walkers critics used the new law to save money. It allowed Milwaukee mayor Tom Barrett, whom Walker had defeated in the gubernatorial race, to slash $36 million from his citys budget, according to a Milwaukee Journal Sentinel estimate. As news of the savings spread, Walker fended off a 2012 recall effort led by government workers, winning a second face-off with Barrett with 53 percent of the vote.
Walkers efforts sparked new GOP interest in checking union influence over state budgets. Back in 2011, Daniels had shown limited enthusiasm for Indiana Republicans effort to pass right-to-work legislation, which bars public- and private-sector unions from forcing workers to become members. But in February 2012, he signed a bill making Indiana the 23rd right-to-work state in the U.S. and the first in the industrial Midwest. Seven years of evidence and experience ultimately demonstrated that Indiana did need a right-to-work law to capture jobs for which, despite our highly rated business climate, we are not currently being considered, Daniels said. The positive effects were immediate. The Indiana Economic Development Corporation noted that about 90 firms considering moves to the state had expressed interest at least partly because of the new law. And an influential business-location trade magazine, Area Development, now ranked Indiana the nations eighth-best business climate, citing the legislation as a factor.
Like Daniels, Michigans Snyder took office without intending to pursue right-to-work. What changed his mind was the unions themselves. Last November, they placed two initiatives on the ballot—one enshrining collective bargaining in the state constitution, the other rolling back a Snyder-signed law that gave fiscal monitors appointed by the governor broad powers to rescue financially troubled municipalities, including the power to rescind provisions of union contracts. Though the first initiative failed, voters passed the second. Its a waste of money, its a waste of time, and its going to keep us from moving our agenda forward, complained Detroit mayor Dave Bing, whose city had used the law to cut costs (see sidebar below).
Those union challenges, plus the outspoken support that businesses had given to Indianas right-to-work law, prompted Snyder to sign a bill in December making the home of the United Auto Workers the 24th right-to-work state. And more such measures are proceeding throughout the country: last year, legislators in 16 states filed right-to-work bills. Some of those states, such as California, are dominated by Democrats, making the likelihood of passage remote. But in others, more purple in their politics than blue—Pennsylvania comes to mind—successful right-to-work legislation isnt hard to imagine, especially in a sluggish economy thats intensifying the competition among states for jobs and investment. Of the ten states with the lowest unemployment rates today, eight are right-to-work.
Vouch for the GOP
Republican governors have blazed trails not just on fiscal matters but on education as well. Central to their reforms are school vouchers—essentially, government currency that parents can use to help pay for private school tuition. Louisianas Bobby Jindal has been among the boldest voucher proponents. Shortly after taking office in 2008, he signed legislation providing government-funded scholarships to private schools for low-income New Orleans students. In 2010, Louisiana added a voucher program for students with disabilities, helping them pay tuition at private schools that serve their needs better than public schools do. And last year, Jindal expanded another scholarship program: it now includes students in all Louisiana families making up to 250 percent of the poverty line. According to state estimates, some 380,000 Louisiana children will eventually be eligible for the vouchers, potentially making the program the countrys largest.
Former Indiana governor Mitch Daniels enacted a series of revolutionary school-choice reforms in recent years. Perhaps the most significant came in 2010, when he instituted public school choice, so that any Indiana public school student could transfer to a school in another district. The results were amazing, Daniels observed. School districts started advertising their graduation rates, test scores, and other academic achievements to attract students. The next year, Daniels signed a bill allowing public school students from low-income families to receive a voucher for private school. The voucher is worth about $4,000 today, according to the Friedman Foundation for Educational Choice.
While not going quite as far as Jindal and Daniels, other Republican governors have pushed to expand vouchers. In 2011, Oklahoma governor Mary Fallin signed a bill providing tax credits for donors to government-approved nonprofits that fund private school scholarships for low-income students. In Ohio, Governor John Kasich signed legislation creating special-education vouchers and expanded the states Educational Choice Scholarship program by raising the cap on the number of vouchers available to low-income students. Florida governor Rick Scott expanded a voucher program for special-ed students first signed into law by Governor Jeb Bush, a leader in education choice during his tenure from 1999 to 2007. Last year, Virginia joined the school-choice movement when Governor Bob McDonnell signed a law that granted tax credits to individuals and corporations donating money to private school scholarship programs for low-income students.
School choice hasnt been the exclusive purview of Republicans, but even reform-minded Democrats havent rushed en masse to support vouchers or government-enabled scholarships to private schools. The GOP governors embrace of these programs represents a bright line between them and their Democratic counterparts on a deeply important policy issue.
Still another fiscal area in which Republican governors differ from their Democratic counterparts involves compliance with the Affordable Care Act. So far, only three Republican governors have agreed to set up the state-run insurance exchanges that the law envisions, and only eight will expand state Medicaid programs to accommodate people newly eligible under Obamacare. Most states with Democratic governors are opting into both programs. The GOP governors are particularly fearful of adding to their Medicaid rolls. While the federal government has promised to pay for the additional Medicaid enrollees for three years, states must start picking up some of the costs after that—and any additional costs will be a real burden for states, which have watched their health spending grow at twice the rate of state revenues over the last 25 years. Nowadays, subsidized health care is the biggest item on most governors budgets—an average of 30 percent, compared with 16 percent in 1987.
States are laboratories of democracy, in Justice Louis Brandeiss famous formulation, and the very different experiments that their Republican and Democratic governors conduct over the next few years—especially on issues that go to the heart of economic competitiveness—will be eye-opening. In the months since President Obamas reelection, its becoming clear that the Republican governors plan to lead in ways consistent with the reform agendas that got them elected. How they fare may steer the Republican Partys course more decisively than any soul-searching in Washington does.