Updated 3 months ago
Reading the headlines, it would appear that state governments are incapable of responsible budgeting. Illinois, New Jersey, New York, Pennsylvania, Massachusetts, and California are among the states that are, to varying degrees, fiscal messes. But some states are more fiscally responsible than others.
The study by Eileen Norcross and Olivia Gonzalez uses 13 indicators to measure fiscal condition. Three of those indicators rank states with leaner budgets as healthier, but most measure the degree to which state governments spend within their means.
States rank high in fiscal health if they maintain a balance of cash and other assets to cushion unexpected revenue declines or expenditure increases, run budget surpluses rather than deficits, and have low unfunded pension liabilities.
Ironically, high-income and high-tax states tend to be the least fiscally healthy.
The bottom three states are high-income Massachusetts, Illinois, and New Jersey. California ranks 43rd. In general, state fiscal health suffers not because of too little revenue, but because of too much spending. Florida shows that fiscal conservatism is very consistent with fiscal responsibility.
We usually think of government as always growing, never shrinking. But a look at Florida’s recent fiscal history shows that governments do sometimes shrink. Florida’s state government expenditures, 10.7 percent of Gross State Product in 1997, fell to 8.9 percent by 2017.
The state’s main source of tax revenue is a 6 percent sales tax, and Florida is one of a few states with no state personal income tax. Ten states with personal income taxes have higher sales tax rates.
Florida’s state budget is not just lower as a percentage of income; the state government is actually spending less per person than in the past. Florida’s recently passed 2017-18 state budget comes out to $4,065 per person. Adjusted for inflation, expenditures per person peaked in 1999-00 at $4,457 and have declined steadily since.
How many governments at any level spend less per person today than they did at the beginning of the millennium?
The same fiscal sensibility is reflected in state government employment. In 1997 the state government employed 1.25 percent of Florida’s population. That number has steadily declined to 0.88 percent in 2015 (the most recent data available)—the lowest of all 50 states.
Florida’s local government expenditures are around the national average. Local governments are not as fiscally conservative as the state government, but they are also not spending more to make up for a lean state government.
Is Florida short-changed on state government services? I have a colleague who moved to Florida a few years ago from New York and before that lived in California. Despite the state’s fiscal conservatism, he told me, he could not see any evidence that he was getting less in the way of government services in Florida than in those high-spending states. Take a Florida vacation and see for yourself if we seem starved of government services.
The question, then, is how Florida is making it work.
Are Florida’s lawmakers just responding to the fiscal conservatism of its citizens? Voters in every state want fiscally responsible governments (if not fiscally conservative ones). And Florida is typically viewed as a swing state that does not lean strongly to the political left or right, casting further doubt on this explanation.
Perhaps Florida’s elected officials are themselves fiscally conservative. While that is certainly true, Florida has eight-year term limits on both the governor and legislators, so decades of fiscal conservatism are not the result of any one individual or group.
Florida has remained fiscally conservative as its elected office holders have changed. California notwithstanding, my current research shows that states with legislative term limits have slower growth in government expenditures.
Another factor may be Florida’s constitutional prohibition against state personal income taxation. Changing that would require 60 percent approval by voters, and that’s not in the cards. In the Mercatus study, the lowest-ranking state with no personal income tax is Washington, which comes in at 26th. The rest are in the top half.
So there is some evidence to suggest that the combination of term limits and the absence of a state personal income tax contributes to Florida’s fiscal success. Only two other states have both: South Dakota, which ranks 3rd in the Mercatus study, and Nevada, which ranks 14th.
Florida’s population growth makes it easier to reduce spending as a share of state income without reducing the number of dollars spent, but spending per person peaked in 2000, right when legislative term limits took effect—and Florida’s population growth was more rapid before 2000 than after. Also, many people believe population growth requires higher government spending, again calling into question population growth as a causal factor.
It seems clear that Florida’s fiscally conservatism is working, even if—like all states—its government is far from perfect. Understanding why Florida has been so fiscally responsible is less clear. But term limits and the constitutional absence of a personal income tax deserve at least some of the credit.
— Randall G. Holcombe is DeVoe Moore Professor of Economics at Florida State University.