Virginia: Gilmore Allies Jumping Ship
In his tenure as governor of Virginia in the late 1990s, Jim Gilmore was notable primarily for one thing: the cut in the state’s “car tax” he championed. It got him elected, and it was the issue he rode throughout his governorship. And lawmakers in other states took note: cutting vehicle property taxes has been a frequent bipartisan goal of state lawmakers for the last decade now.
But, as countless Virginia observers (and a bunch of angry lawmakers) have noted since then, supporters of the Gilmore car tax cut were sold a bill of goods. It turned out almost immediately that repealing the car tax was unaffordable, since the short-term surpluses that made the tax cut seem feasible were, well, short-term. And Gilmore’s tax cut has been a political football in the state’s budgeting process ever since.
Now, Gilmore has decided to make another run at statewide office, and is running against Mark Warner for the US Senate seat being vacated by John Warner. And he’s finding out what happens when a snake-oil salesman tries to fool the same people twice: it doesn’t work.
The Washington Post reports this week that Vincent Callahan, a Republican lawmaker who was instrumental in the initial passage of Gilmore’s car tax cut, is endorsing Gilmore’s Democratic opponent, Warner, in this fall’s race. The reason, according to Callahan: Gilmore’s misleading advocacy of the car tax cut last time around.
Callahan said Gilmore, Warner’s GOP opponent, misled legislators and the public about the state’s finances and the cost of his signature effort to eliminate the car tax when he was governor from 1998 to 2002. ‘The figures Gilmore used were so utterly erroneous and far-fetched that they were mind-boggling,’ said Callahan.
Of course, revenue forecasting is often more of an art than a science. But in retrospect, there’s little disagreement (from anyone except Gilmore himself, that is) that Gilmore lowballed the cost and the affordability of his car tax cut .
A Washington Post editorial noting Gilmore’s razor-thin primary win over a relative nobody for the GOP nomination offers a scathing review of Gilmore’s fiscal policy record:
At the heart of the Gilmore legacy was his insistence on ramming through a tax cut whose dimensions dwarfed his cavalier initial estimates, and his simultaneous approval of heavy increases in state spending, a strategy — if it can be called that — suggesting that Mr. Gilmore assumed that the boom times in Virginia would never end. He pursued his signature tax cut, a phased repeal of the levy on personal vehicles, even after it became crystal clear that the repeal would drain hundreds of millions of dollars from the budget and cripple state finances. He insisted on his course despite being warned — by fellow Republicans, among others — that it would eventually force deep reductions in spending on core state priorities including transportation and education. And he shrugged off specific, repeated and well grounded forecasts that Virginia was heading for an economic slowdown brought on by the bursting of the technology and stock market bubble — a slump Mr. Gilmore simply denied.
In Mr. Gilmore, Virginia had its very own Herbert Hoover. “State government is in sound financial shape,” he declared sunnily in August 2001, even as state lawmakers from both parties predicted a $500 million revenue shortfall in the commonwealth’s $25 billion budget — about 10 times Mr. Gilmore’s own projections and, as it turned out, itself an underestimation of the state’s actual woes. Mr. Gilmore’s allies
sometimes argue that no one could have foreseen the economic effects of the Sept. 11 attacks, which occurred four months before he left office. True enough, but also irrelevant: The problem had swollen to major proportions well before the attacks, and Mr. Gilmore ignored it.
He did so in part by budgetary gimmickry and sleight of hand of the sort seldom seen in Virginia, with its stodgy custom of fiscal prudence. When it became plain that the state’s revenue growth had hit a wall, a condition that Mr. Gilmore himself had said would preclude a further rollback of the car tax, he proposed a novel solution: conjuring revenue by borrowing against a one-time legal settlement with tobacco companies. That scheme, which encapsulated Mr. Gilmore’s poor judgment and fondness for budgetary trickery, elicited groans from Republican and Democratic lawmakers alike.
Today, Mr. Gilmore innocently states that on leaving office in 2002 he bequeathed a balanced budget and $1 billion in reserves. But the balanced budget was a fiction that papered over a yawning deficit with shenanigans such as requiring retailers to prepay their sales tax and employers to prepay their withholding tax. And the reserves, for which Mr. Gilmore bears no responsibility — they were statutorily required — did nothing to forestall the state’s fiscal crisis. It fell to Mr. Warner, who succeeded Mr. Gilmore as governor, to fix what quickly mushroomed to a nearly $4 billion problem.
Wow.
Great Expectations
I’ve been reading up on the Great Depression (never say those of us at TPC don’t know how to have fun) and am struck by one overriding thought: Even with the benefit of 80 years of hindsight, economists still can’t agree on either what went wrong or how the economy got back on track.
There is an important lesson here. Famously impatient, Americans not only expect government to fix today’s economic crisis, they demand it. Barack Obama, I suspect, will have about a year to turn things around before the public turns on him. Yet, if we still don’t know what happened in 1929, how can we expect policymakers to truly understand—and correctly address—events happening in real time today?
Here is the dirty little secret: Obama doesn’t know how to fix the recession. Nobody does. It is easy (though wrong) to say Herbert Hoover failed to grasp the enormity of the Depression. But in truth, FDR had little better idea of how to respond to the crumbling economy. In fact, Roosevelt was famous for trying one solution after another until something seemed to work.
There is broad agreement on what government should not do, such as run a tight monetary policy or restrict trade. But there is much less consensus on what it should do. How much will pulling fiscal levers boost demand? Is massive new government spending really such a good idea? Will tax cuts get people and businesses spending again?
When credit markets collapsed earlier this year, George Bush turned to his group of wise men for advice. They included Fed Chairman Ben Bernanke, a highly-regarded student of the Depression. President-elect Obama has now chosen his team, including Christy Romer, another expert on that era. They are very smart, and have access to far better data than their counterparts had in the 30s.
But today’s data are not that good. And there is no magic bullet. For instance, Treasury Secretary Hank Paulson has been roundly criticized for his on-again-off-again use of the TARP. First, he insisted on using the $700 billion to acquire bad assets, then he decided to pump liquidity into financial institutions, and now he is giving $13 billion to the auto companies. This seems incoherent because it is. But trial-and-error is as inevitable in economics as in medicine—another field based more on art than science.
Obama’s stimulus plan, which by some accounts will cost $850 billion or more, will include its share of bad ideas. Some initiatives may at first seem to make perfect sense but will inevitably have dreadful unintended consequences. And there will be good ideas that should be in the plan but fail to make the cut.
Those of us who kibbitz from the sidelines will identify mistakes and demand better alternatives. But we should have no illusions. Getting a huge, complex, and still poorly understood economy back on track is not going to be simple and it will take time. Obama, despite the stratospheric expectations he’s raised, is going to make errors. We will, and should, call him on those poor choices. But we’d be fools to expect perfect diagnosis and treatment from the incoming Administration.