Shortly before leaving office in January, former Maryland governor Martin O’Malley found himself speaking on the phone to a utility-company employee about setting up an account for his family’s new private residence. Asked how he spelled his last name, O’Malley, a Democrat, responded: “Like the outgoing governor.” The woman on the other end of the line quipped, “Ah, yes. The tax man.”
O’Malley himself tells this story, perhaps to burnish his left-of-Hillary credentials for a 2016 presidential run. But the tax-happy reputation he gained in Maryland—by one estimate, he hiked taxes and fees 40 times during his two terms—probably cost his party the governorship last November. Republican challenger Larry Hogan, founder of the antitax group Change Maryland, defeated the Democratic candidate, then–lieutenant governor Anthony Brown, in a state that Gallup recently declared America’s second-most Democratic. Hogan wasn’t the only 2014 GOP gubernatorial candidate to win in deep Blue territory. Republicans also captured the governor’s mansion in Massachusetts (the country’s most Democratic state, according to Gallup) and in Illinois (the ninth-most). Republicans picked up a governor’s seat in GOP-leaning Arkansas, too, with Asa Hutchinson succeeding term-limited Mike Beebe. The Democrats, by contrast, took only one governorship from Republicans, in Blue-tinted Pennsylvania.
The victories continued a remarkable state winning streak for Republicans since Barack Obama became president. Pundits initially described the 2008 election as a major leftward shift in American politics, and it’s easy to see why: as the Obama era opened, the GOP held just 22 governorships and 14 state legislatures. But voters almost immediately began electing Republican lawmakers who rejected Obama’s call for bigger government and higher taxes. And they kept electing them last year, despite failed efforts by Democrats’ union allies to unseat incumbent Republican governors like Scott Walker in Wisconsin and John Kasich in Ohio. Today, Republican governors rule in 31 states, and the party has gained nearly 900 state legislative seats, giving it control of 30 state legislatures; Democrats hold the majority in 11, with eight split, and one (Nebraska’s) unicameral and officially nonpartisan.
That leaves the Republican Party with an array of highly visible elected officials in states likely to decide the 2016 presidential election. Further, if the GOP maintains momentum through the next election cycle, it will control a majority of state governments during the upcoming redistricting process, which will determine the election map for Congress and state legislatures throughout the 2020s. The long-term balance of power in American politics may well rest, then, with how the Republican governors perform during the next few years. And the Democrats know it: the national party’s Legislative Campaign Committee has launched a special fund-raising campaign—Advantage 2020—to help state parties retake state capitols.
Republican candidates’ recent success resulted partly from local voter backlash against state tax increases during the Great Recession. Confronting budget crises back in 2009, with tax collections plunging 8 percent as the economy reeled, many governors assumed that voters would accept a bigger government pinch on their income. After all, Obama had just won the presidency decisively, running on a liberal platform. States proceeded to pile on $29 billion in new taxes in 2009, according to the National Conference of State Legislators—collectively, the largest single-year state hike ever recorded. It turned out to be a bad move politically. Republican gubernatorial hopefuls ran successfully against the rising taxes and in favor of restraining spending in New Jersey, where Democratic governors had raised taxes by approximately $5 billion over eight years; in Wisconsin, where Democrat Jim Doyle had boosted them by $3 billion over the same period; and in six other states with tax-friendly Democratic governors.
The newcomers aggressively implemented their agendas over the next few years. First-term Michigan governor Rick Snyder jettisoned the ill-conceived Michigan Business Tax—levied on a firm’s gross receipts—in 2011, and replaced it with a flat corporate income tax. Then he made up for much of the $700 million in lost state revenue by ending about $400 million in corporate subsidies and closing loopholes in the personal income tax. In 2013, New Mexico’s Susana Martinez slashed corporate rates by 22 percent and reformed the tax code to end loopholes and exemptions worth hundreds of millions of dollars. Kasich reduced Ohio taxes by some $3 billion during his first term by pushing down the rates for personal income and small businesses and raising exemptions for lower- and middle-income residents. In North Dakota, a state swimming in energy revenues, Jack Dalrymple scythed corporate and personal taxes by $500 million in 2011 and another $250 million in 2013. New Jersey’s Chris Christie cut the state’s business taxes, among the nation’s highest, by $600 million in 2011, and he capped local property-tax hikes. Christie also vetoed a series of personal income-tax increases that the Democrat-controlled state legislature had sent him. In North Carolina, Pat McCrory consolidated three tiers of the state income tax into a single rate and lowered corporate rates, bringing down taxes overall by $700 million in 2013. In 2012, Kansas’s Sam Brownback whittled three income-tax tiers to two lower rates, reducing taxes by $800 million.
Many of these moves proved controversial with the liberal press and activist groups—and with special interests that had suddenly lost a tax exemption or government payment. Christie was bombarded with criticism after he refused to renew an $800 million temporary levy on upper-income residents that his Democratic predecessor, Jon Corzine, had enacted, and instead trimmed the New Jersey budget, including school aid. Snyder’s reforms, which included ending income-tax exemptions for public-employee pensions, provoked an unsuccessful recall movement. A liberal policy group, New Mexico Voices for Children, charged that Martinez’s reductions made “corporations a higher priority” than the state’s “working families and their children.” Brownback’s reforms sparked a pushback from state legislators in his own party, and even from the conservative Tax Foundation, which argued that the reforms didn’t include enough spending reductions to offset the lost tax revenue. Still, despite struggling with gaping budget deficits, Brownback won an unexpected—but convincing—reelection last November, a reflection of the antitax sentiment of much of the American electorate. All the other tax-slashing governors wound up reelected, too, often seeing their fortunes rebound as their policies began to bear fruit.
The antitax fervor continued in 2014, spreading to solidly Democratic states that had seen recent tax hikes. A Change Maryland study estimated that O’Malley’s tax and fee increases—among them, higher income taxes on people earning more than $100,000 annually, raised corporate rates, and new fees for things like “storm-water remediation” (derided by Hogan as a “rain tax”)—cost residents $9.5 billion in extra money sent to Annapolis over his two terms. Those dollars came on top of more than $3 billion in new taxes imposed by O’Malley’s predecessor, Republican Bob Ehrlich. Hogan rode to victory promising to eliminate some of the new levies and shrink taxes on retirees and small businesses. So far, the new governor has won a rollback of the storm-water fees and an income-tax reduction for some seniors, though further reforms may be put on hold as he undergoes cancer treatments.
Massachusetts provides another striking example. Democrat Deval Patrick used the waning years of his governorship to propose an eye-popping $2 billion in higher taxes and fees. In 2013, the Democrat-dominated state legislature instead passed a smaller $500 million package of new taxes, which the governor grumbled wasn’t enough. After Patrick declined to seek a third term, Republican Charlie Baker defeated his Democratic rival, state attorney general Martha Coakley, by pledging to close Massachusetts’s $1 billion budget gap without raising taxes. Baker, a former health-insurance executive, also campaigned on the theme of competently managing the state’s finances after widespread public criticism of Patrick’s slapdash governing style. “Former Gov. Deval Patrick was a fine fellow,” wrote WBZ-TV News political analyst Jon Keller earlier this year. “But in the end he turned out to be a terrible manager who left a disaster behind.”
In Illinois, Democratic governor Pat Quinn, mismanaging a budget that had accumulated more than $5 billion in unpaid bills after he’d been in office just two years, jacked up taxes by a staggering $7 billion in 2011. His Republican opponent in 2014, Bruce Rauner, campaigned victoriously on refusing to renew the new levies. Rauner said that he would balance his first budget entirely with spending reductions, but after the Illinois Supreme Court shot down the state legislature’s 2013 pension reforms this May, his task will be daunting. (This year, the Democrat-controlled Illinois legislature sent the governor a budget that spends $3 billion more than the state has; Rauner has refused to increase taxes to close the gap, leaving the state without a budget going into the summer.) Hutchinson similarly pledged during his campaign last year to lighten Arkansas’s tax burden. His November victory made him the state’s first Republican governor backed by a GOP-controlled legislature in over a century, and he quickly fulfilled his promise. In February, he signed legislation decreasing income taxes by $90 million annually, with most of the savings going to those earning between $21,000 and $70,000 a year.
Even as the Republican newcomers battle to cut taxes, a handful of incumbent GOP governors, now entering second terms, are forging the next stage in the revolt. Rather than focusing merely on reductions, they’re seeking to reform the way their states raise revenue. They want to move away from income levies—both individual and corporate—and toward consumption taxes, which tax people based on the money they spend, not on the income they earn. Economists have long argued for the benefits of such a shift. Leaning heavily on income taxes for revenue, as our system broadly does, discourages savings and investment. A sales-tax-based system, by contrast, leaves individuals with bigger paychecks and businesses with higher profits; only when and if they choose to spend that money does it get taxed, while before that point, as savings, it can help finance product research and investment in new equipment or workers. Faced with a budget gap for next year, Kansas governor Brownback refused to hike income taxes but instead allowed the state’s sales tax to rise, justifying the move as a transition to a more consumption-oriented tax system. Democrats and Republicans are warming to this idea on the federal level, but President Obama’s opposition makes any change unlikely before he leaves office. That makes it more likely that the states will become the laboratories of reform.
Earlier this year, Kasich declared that he wanted to “reduce Ohio’s reliance on the antigrowth income tax by transitioning toward a more consumption-based tax system.” He proposed extending the sales tax to services like public relations, lobbying, and management consulting, while eliminating income taxes on small firms and poorer households and reducing them for others. The reform would produce a $500 million net tax cut, Kasich claims, but more important, its long-term effect would be to elevate savings and investment. Underscoring the revolutionary nature of the proposal, his own Republican-led legislature cut income-tax rates by less than Kasich wanted but has refused for now to shift toward consumption-based levies.
Like many states, Maine exempts various products and services from its sales tax, thus creating a narrow tax base and favoring particular industries. In Governor Paul LePage’s ambitious reform proposal, the state would extend the sales tax to products like personal services (such as haircutting), repair and maintenance contracts, entertainment tickets, and professional services (accounting, for instance)—but at the same time, it would cut personal income taxes by lowering rates for all filers and, for poorer residents, expanding the amount of tax-exempt income, helping counter the charge that raising the sales tax hurts the poor. LePage’s proposal also phases in reductions to the state’s corporate income tax. The governor projects savings of nearly $300 million for state residents. His ultimate goal: end the state’s income taxes. “But I’m no magician,” he says. “It takes time.” LePage has threatened to take his idea to voters in a ballot initiative if the Democrat-controlled state legislature doesn’t pass it.
South Carolina’s Nikki Haley is another Republican second-termer advocating for comprehensive tax reform. In exchange for raising the gas tax by 10 cents a gallon, which the GOP-majority state legislature is pushing for to fund infrastructure projects, she has proposed an income-tax cut that could amount to more than $1.5 billion in taxpayer savings, as well as a restructuring of the state Department of Transportation to make infrastructure spending more efficient. “We have not gotten to where we are as a state, with our strengthening and growing economy, by raising taxes. Quite the opposite,” Haley recently observed. Haley’s resistance to a net tax increase is well tuned to the antitax mood in the states; even Michigan’s Snyder, despite his solid record as a tax cutter, saw a proposed gas-tax increase in Michigan that he supported lose heavily at the ballot box earlier this year.
Tax reform has been part of a broader strategy of Republican governors to make their states more competitive, and thus draw new businesses and investment, during a spluttering national recovery. Over the last four years, several GOP governors heralded their pro-business credentials not only at home but also in Democratic states. Former Texas governor Rick Perry visited California, New York, Illinois, Connecticut, and Maryland to lure firms, and Texas backed the trips with provocative ads. “When you grow tired of Maryland taxes squeezing every dime out of your business, think Texas,” Perry said in a spot that ran in O’Malley’s backyard, reinforcing Hogan’s antitax message. “Texas is calling,” Perry told New York businesses. “Your opportunity awaits.”
Iowa’s Terry Branstad, Utah’s Gary Herbert, and South Dakota’s Dennis Daugaard also traveled to California to promote their states. Justifying his visit, Branstad noted that Iowa frequently gets calls from California firms seeking to relocate. “They want to get out of California as quick as they can. We welcome them to Iowa,” he said. (California governor Jerry Brown’s office derided the idea that Golden State companies would flee “for the cold, empty and desolate hinterlands.”) Wisconsin’s Scott Walker and Florida’s Rick Scott ventured to Illinois to entice businesses. The Illinois Chamber of Commerce even invited Walker to address local business leaders. Florida’s Scott says that he hopes to make his state the Number One destination for relocating firms. Just weeks after Democrat Tom Wolf took office as Pennsylvania’s governor, Scott headed to the state to drum up business. “Pennsylvania Gov. Tom Wolf has proposed increasing taxes and implementing regulations that will hurt businesses,” Scott said in a letter to Keystone State entrepreneurs.
A key Republican competitive initiative is right-to-work legislation, which empowers employees to opt out of joining a union if their workplace is unionized. Only two states passed right-to-work laws from the 1980s through 2012, but since then, three states, each with a GOP governor and legislature, have adopted the policy—Indiana, Michigan, and Wisconsin. Except for Ohio, every state with a Republican governor and legislature is now right-to-work—a likely game-changer in relocation wars, especially for blue-collar firms. In a 2012 survey, the trade publication Area Development found that 75 percent of manufacturers considered right-to-work an important factor in deciding location. Many said that they wouldn’t even consider moving to a state lacking such legislation. Former Indiana governor Mitch Daniels signed a right-to-work bill in 2012, the final year of his two terms in office, and he now thinks that he should have done so sooner. “During the debate [over right-to-work legislation], which was very contentious, I was urging both sides not to overreact or exaggerate,” Daniels told Area Development. “But I may have underestimated the impact. We have had a flood of calls and inquiries, starting literally the day I signed the bill.” Michigan and Wisconsin passed right-to-work largely because they witnessed businesses’ enthusiastic reaction to Indiana’s law.
Right-to-work has doubtless contributed to the significant growth in industrial jobs in states with Republican governors over the last four years. Since 2010, the United States has added 660,000 new manufacturing positions—and more than 500,000 were in states with GOP governors. Among the biggest gainers: Michigan, with 102,000 new manufacturing jobs, Texas with 72,000, Indiana with 63,000, Wisconsin with 34,000, Tennessee and South Carolina with 25,000 each, and Georgia with 18,000. The expansion contrasts with the struggles of Democratic strongholds, including former manufacturing powerhouses like California and New York. While California still has 1.25 million industrial jobs, it has produced just 8,000 new ones during its latest recovery. New York, which preceded California as the nation’s leading industrial state, has lost 9,000 manufacturing positions since 2010. Of course, right-to-work alone can’t account for all this activity, as evidenced by the 54,000 new industrial jobs in Ohio, where Governor Kasich has worked to reduce not only tax rates but also regulations. “When you go into a small business and you hassle them and impose rules that don’t make any sense, you’re not hassling the business. You’re killing somebody’s job,” says Kasich.
Rising costs abroad and shrinking expenses here—including energy prices—have led more American firms to bring industrial work back home. (See “No Shore Thing,” Winter 2015.) And much of that investment appears to be landing in Republican-controlled states. A California Manufacturers and Technology Association study, using data through 2013, compared per-capita investments in new and expanded industrial facilities by state—nine of the top 10 had Republican governors. (The exception was Kentucky, where Democrat Steve Beshar presides over a politically divided legislature.) By contrast, per-capita industrial investment in California was only one-tenth of the national average; New York received just 40 percent of the national average.
Not coincidentally, hydraulic fracturing’s contribution to the manufacturing revival has also largely transpired in Republican-controlled states, reflecting how these locales have chosen to regulate fracking. Some of the nation’s biggest untapped oil and gas reserves, which fracking could unleash, are located in solidly Democratic California and New York. Yet Democratic governor Andrew Cuomo has banned fracking in New York, and California has made it so difficult that there has been little uptick in the state’s oil and gas production. In fact, extensive fracking has been going on in only one state that Gallup rates as leaning Democratic: Pennsylvania, which had a Republican legislature and governor for the last four years. Most of the big boost in U.S. energy production of late has occurred in solidly Red states like Texas, North Dakota, Oklahoma, Louisiana, and Wyoming, or in politically competitive ones, like Colorado.
The new Republican governors are trying to scissor red tape, too. Arizona’s Doug Ducey, for example, has placed a moratorium on state executive-branch regulations and ordered every agency to provide him with a review of current rules, with the aim of eliminating needless ones. The order was Ducey’s first official act. On his second day in office, Hutchinson ordered Arkansas agencies to supply his administration with all proposed regulations for review. And Massachusetts’s Baker, not to be outdone, has ordered a yearlong assessment of his state’s regulations.
But the most sweeping reform package by a new Republican governor may well be Bruce Rauner’s. His “Illinois Turnaround” plan could be as transformative as Scott Walker’s 2011 budget-repair bill, which narrowed collective bargaining rights for Wisconsin government workers and has produced substantial savings. In announcing his bold agenda, Rauner points to the many ways that his state fails to compete. Illinois has the seventh-highest worker-compensation costs and the ninth-priciest unemployment-insurance taxes in the nation; business leaders surveyed by Chief Executive ranked it the third-worst American state in which to do business. Rauner seeks to shrink Illinois’ high worker-compensation costs, starting with the hefty amounts the state pays for treating on-the-job injuries—often 100 percent to 200 percent above private insurance rates. He also calls for extensive lawsuit reform, targeting, among other things, “venue shopping”—in which plaintiffs can file lawsuits in the county where they’re most likely to win, regardless of where they reside or received their injury. Rauner wants to give citizens the right to create “employee-empowerment zones,” where workers could opt out of any private or public union. He also says that municipalities should be able to exclude from collective bargaining negotiations things like health-insurance benefits, evaluation criteria for government employees, and required levels of staffing, all of which tend to drive up costs. And he’s lobbying to expand, so that it covers unions, an Illinois law prohibiting contractors with more than $500,000 in government business from contributing to political elections. Rauner will face stiff odds getting these major reforms through a Democratic legislature in labor-friendly Illinois. But he won a key endorsement from the Chicago Tribune: “We hope . . . that voters who elected him in November see the thrust of this agenda, if not its every jot and tittle, as a path to growing Illinois’ economy and thus its revenues.”
Republican successes have encouraged at least some imitation in Democratic circles, primarily on taxes. New York governor Andrew Cuomo, most notably, waged a campaign to reduce taxes in 2014 by declaring that “New York has no future as the tax capital of the nation.” In March 2014, Cuomo signed into law a reform package that cut the state’s corporate levy and reduced its complexity, while also easing the estate tax and offering property-tax rebates to homeowners. The measure followed Cuomo’s enactment of a property-tax cap in 2011. Similarly, Minnesota’s Democratic governor, Mark Dayton, approved $443 million in tax cuts last year. Though some of the savings were simply a rollback of controversial sales-tax increases, the reforms included repeal of the state’s gift tax and expanded deductions for households with mortgage debt and child-care expenditures.
Earlier this year, the Democratic Party’s Victory Task Force outlined its project to reverse Republican gains in the states. But it remains to be seen whether the party is willing to face up to the reasons behind the GOP’s winning streak. The task force’s initial document attributes Republican victories to the lack of a consistent Democratic message and to state laws that Democrats contend have made it harder to vote in many places. The document says nothing about economic or fiscal policies, or about state competitive issues that Republican governors have used as a hammer in their recent political fights.
Since Barack Obama’s election in 2008, Republican candidates in the states have promised that they would show the country another way of governing. They’ve delivered, and voters have responded. Judging by the evidence of 2014, the insurgency isn’t over.