State Tax Cuts of 1995: Is Something New Afoot?

Perhaps the hottest fiscal topic in state capitals in 1995 was tax cuts. When legislatures convened in January, it appeared possible that states were on the verge of an unprecedented wave of tax cuts. The Republican landslide of November 1994 swept into office many new governors and legislators who had campaigned on reducing taxes. Governor Christine Todd Whitman of New Jersey was considered a role model by many of them. Perhaps state tax policy was about to take a major new direction. According to some reports, that is precisely what happened. For example, Stephen Moore, Director of Fiscal Policy Studies at the Cato Institute, wrote the following introduction to his overview of state tax policies:1 1995 is shaping up to be the biggest tax-cutting year in more than 10 years…. [T]he supply side philosophy that low tax rates and expenditure controls are the key fiscal tools to state economic competitiveness now appears to be the new governing philosophy in state capitals from Albany to Sacramento. The Pete Wilson, Lowell Weicker, Jim Florio soak-the-rich philosophy of the early 1990s has been nearly universally repudiated across the states. Meanwhile, “Whitmanomics,” named after tax-cutting Christine Todd Whitman of New Jersey, is spreading rapidly to other states. In fact, there was a wave of state tax cuts in 1995 with about half of the states enacting reductions of some kind. But it appears premature to draw the strong conclusion that this marked a radical change in state fiscal policy. State legislatures trimmed or rejected most of the proposals for large tax cuts. Most of the 1995 tax cuts were small or modest in size Rather than a new departure, they are consistent with past policies at similar points in the business cycle. It is also possible, however, that something new really is afoot. Conservative anti-tax forces are gaining strength in the states, just as they are at the federal level. If it were not for prospective federal aid cuts, state tax policy really might become more conservative. But the shift of federal responsibilities to states will represent a formidable obstacle to large state tax cuts in the coming years. This article places the tax cuts of 1995 in perspective. It begins with a detailed discussion of ambiguities'in defining and measuring tax reductions and increases. This discussion can be applied to any time period and will remain relevant after concern