RUTHFULLY YOURS

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 we’re the only organization to add Republican strength,” Christie said, “is because people see us getting things done.” Christie’s stance countered most of the elite postelection commentary, which gleefully pronounced the Republican Party’s 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 didn’t reverse their state-level momentum.

Chris Christie, New Jersey

The next-wave Republican governors have ignored proclamations that President Obama’s 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. They’ve 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 don’t 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. Christie’s 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 Jersey’s income tax.

Christie’s 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 Christie’s 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 Michigan’s Rick Snyder, a former venture capitalist with no previous experience in office. Snyder initially received less national attention than Christie or Wisconsin’s Scott Walker, whose battle with government unions grabbed headlines throughout 2011. Perhaps Snyder’s post-partisan image was what kept him off the national press’s radar for so long: he ran as a wonk who would use his business acumen to fix the state’s finances.

Rick Snyder, Michigan

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 didn’t just tax businesses’ profits, as most corporate taxes do; it taxed their revenues as well, meaning that firms had to pay even when they weren’t making money. Politicians and policy experts in Michigan had long acknowledged that the MBT was one of the nation’s 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.

Snyder’s 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. Snyder’s 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 state’s tax code. The new arrangement moved Michigan’s corporate levy from next-to-worst in the Tax Foundation’s national rankings to 18th best. “The Wicked Witch is done,” Snyder said.

Nor was that the end of Snyder’s reform drive. Last year, he lowered Michigan’s personal income-tax rate. And now he’s seeking to eliminate the state’s so-called personal property tax, which is actually an outdated tax on business equipment. Snyder’s 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 Snyder’s passion for tax reform that attracts businesses. Pennsylvania’s Tom Corbett quickly took aim at his state’s 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 state’s business environment has won a reputation as one of the country’s harshest. Calling the levy a “job-killer,” Corbett reduced it by 40 percent and wants to end it entirely once the state’s 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 Jersey’s playbook and signed a law allowing Pennsylvania voters to approve or veto tax increases proposed by school boards.

Tom Corbett, Pennsylvania

In Maine, former businessman Paul LePage, also elected governor in 2010, has worked to reform the tax code in a state with one of America’s 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 Maine’s 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. Scott’s 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 he’s been in office, a feat that has enabled him to make the tax cuts and also to lighten Florida’s long-term debt by $1.5 billion.

These fiscal moves drew little national attention, though that’s 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 Nebraska’s 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. He’s asked the legislature to study the impact of his proposal before proceeding. Louisiana’s 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. Jindal’s 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. (He’s 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.

Bobby Jindal, Louisiana

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 state’s income-tax rate from 6.45 percent to 4.9 percent. “The governor said early on, . . . ‘Go bold.’ And we did,” said Mike O’Neal, 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. He’s now hoping to end enough tax-code deductions and loopholes to save Kansas more than $1 billion in revenue.

Sam Brownback, Kansas

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 year’s 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 Chicago’s 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 Poor’s, noting unpaid bills, downgraded Illinois’ investment rating, so that it now resides with California’s at the bottom of the company’s state rankings.

Or consider the victory that California’s 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 state’s 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 state’s pension fund for teachers. Still more recently, Massachusetts governor Deval Patrick has called for $1.9 billion in new taxes.

Some Democratic governors haven’t hesitated to use budgetary sleight-of-hand to raise taxes while claiming that they weren’t. New York’s 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 isn’t 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.

Today’s 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 state’s $700 million budget deficit by making the government more effective and less expensive. Fresh from his tenure as George W. Bush’s 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 state’s 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.

Daniels’s 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 nation’s 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 state’s unfunded pension liabilities—among the nation’s worst—and require greater health-care contributions from government employees. Christie’s 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.

Wisconsin’s 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.

Scott Walker, Wisconsin

But once the legislature passed Walker’s 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 Walker’s 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 city’s 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.

Walker’s 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 nation’s eighth-best business climate, citing the legislation as a factor.

Like Daniels, Michigan’s 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. “It’s a waste of money, it’s a waste of time, and it’s 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 Indiana’s 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 isn’t hard to imagine, especially in a sluggish economy that’s intensifying the competition among states for jobs and investment. Of the ten states with the lowest unemployment rates today, eight are right-to-work.

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 Brandeis’s 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 Obama’s reelection, it’s 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 Party’s course more decisively than any soul-searching in Washington does.

Steven Malanga is the senior editor of City Journal and a senior fellow at the Manhattan Institute. His latest book is Shakedown: The Continuing Conspiracy Against the American Taxpayer.