How the 50 states rank in taxing and spending wisely:[FINAL Edition]

USA TODAY. McLean, Va.: Jun 23, 2003.  pg. A.02

Full Text (1260   words)

Copyright USA Today Information Network Jun 23, 2003

See also Cover Story/Special report on 1A.

Correction ran 6/27/2003: A chart on Page 2A Monday gave Florida an incorrect rating in one of three categories used to rank the 50 state governments in financial management. Florida's score in the effectiveness of state tax systems should have been two stars instead of the maximum four it received. The lower rating drops Florida's overall ranking from good to fair. USA TODAY ranked the effectiveness of state tax systems based on an analysis by Governing magazine.

USA TODAY analyzed the financial health of all 50 state governments. The study assessed how states managed their finances during a five-year period in which the economy went from boom to recession. States were given zero to four stars in three categories (four stars are best; zero is worst):

* Spending growth, adjusted for inflation and population growth.

* Bond ratings, which are Wall Street's assessment of a state's financial health.

* The quality and fairness of their tax systems, according to a study by Governing magazine and the Pew Charitable Trusts.

The stars in each category were totaled to determine the final ranking.

How the states were evaluated

* Spending restraint. USA TODAY used Comprehensive Annual Financial Reports from the states to create a detailed database on state finances. These audited reports provide the most accurate numbers on state spending and revenue.

The newspaper calculated each state's spending growth from 1997 through 2002. Nationally, state spending grew 6.7% annually from 1997 through 2002, or a total of 38%. That was 3.7 percentage points per year higher than the rate of inflation and population growth combined. USA TODAY subtracted the rate of inflation and population growth to determine how much spending growth resulted from policy decisions rather than higher costs and more residents.

Colorado, by constitutional amendment, limits spending growth to the rate of inflation plus population growth unless voters approve otherwise. This standard has won support from politicians of both parties as a way to control spending growth.

USA TODAY awarded stars based on how closely state spending tracked inflation and population growth during the past five years. States were awarded stars for the following rates of spending increases, after subtracting the rates of inflation and population growth:

* * * * Four stars: less than 1% annually.

* * * Three stars: 1% to 2% annually.

* * Two stars: 2% to 4% annually.

* One star: more than 4% annually.

* Bond ratings. Moody's, Standard & Poor's and Fitch Ratings assess the ability of states to repay debt. The ratings also consider a state's economy, how well a legislature has managed state finances and the soundness of state pension funds.

The bond-rating agencies give six grades, generally using AAA as the top rating and A as the lowest. Thirty-five states are rated by all three agencies. Eleven states are rated by two agencies. Four states have one rating. USA TODAY averaged the agencies' ratings for long-term general obligation bonds or similar debt.

The top 10 states, which have AAA ratings from two or more rating agencies, earned four stars. The next 12 states got three stars; 16 states got two stars and 10 states got one star. California and Louisiana, which have ratings two notches below those of any other state, got no stars.

* Taxes. USA TODAY ranked state tax systems based on a yearlong analysis by Governing magazine. The study, published in February, was financed by the Pew Charitable Trusts, a non-profit organization in Philadelphia that supports programs to increase public confidence in government. The study gave states one to four stars in each of three categories: adequacy of revenue, fairness to taxpayers and management quality. For adequacy, the magazine examined whether the state has a diversified tax system that can pay for programs the legislature has traditionally authorized. For fairness, the magazine analyzed whether taxpayers of similar incomes pay similar amounts in taxes. The magazine gave the best marks to states that have low income and sales tax rates; tax a broad range of goods, services and income; and offer few special-interest tax breaks. This practice generally produces stable revenue flows. For management quality, the study considered how well tax laws are enforced and how well a state uses technology. USA TODAY totaled the stars, which averaged 6.8 per state. The states that ranked above the national average were rated highest in the newspaper study: the top 15 states were given four stars; the next 15 were given three stars. The 20 states falling below the national average were ranked lowest: 12 got two stars, eight got one star.

The full study is available at www.governing.com/gpp/2003/ gp3intro.htm.

Spending restraint

Bond rating

Tax system

Total stars

---

Excellent

Utah

* * * *

* * * *

* * * *

12

Delaware

* * *

* * * *

* * * *

11

Georgia

* * * *

* * * *

* * *

11

Michigan

* *

* * * *

* * * *

10

Minnesota

* *

* * * *

* * * *

10

North Carolina

* * *

* * * *

* * *

10

Good

Florida

* *

* * *

* * * *

9

Hawaii

* * * *

*

* * * *

9

Indiana

* *

* * *

* * * *

9

Iowa

* * *

* * *

* * *

9

Maryland

* *

* * * *

* * *

9

Missouri

*

* * * *

* * * *

9

Washington

* * *

* * *

* * *

9

Arkansas

* * * *

* *

* *

8

Idaho

* * *

*

* * * *

8

Kansas

* *

* * *

* * *

8

Maine

* *

* * *

* * *

8

Nevada

* * * *

* * *

*

8

New Mexico

*

* * *

* * * *

8

Ohio

* *

* * *

* * *

8

Vermont

*

* * *

* * * *

8

Fair

Connecticut

* * *

* *

* *

7

New Hampshire

*

* * *

* * *

7

Pennsylvania

* *

* *

* * *

7

South Carolina

*

* * * *

* *

7

Texas

* * *

* * *

*

7

Virginia

*

* * * *

* *

7

Wisconsin

* * * * * * * 7

Wyoming

*

* *

* * * *

7

Alabama

* * *

* *

*

6

Alaska

* *

* *

* *

6

Kentucky

* *

* *

* *

6

Louisiana

* * * *

--

* *

6

Massachusetts

*

* *

* * *

6

Nebraska

*

* *

* * *

6

New Jersey

*

* *

* * *

6

New York

* *

*

* * *

6

North Dakota

*

*

* * * *

6

Oregon

* *

*

* * *

6

South Dakota

*

*

* * * *

6

Poor

Arizona

* *

*

* *

5

Colorado

* * *

*

*

5

Illinois

* *

* *

*

5

Oklahoma

*

* *

* *

5

Rhode Island

*

* *

* *

5

Tennessee

* *

* *

*

5

West Virginia

* *

*

* *

5

Mississippi

*

* *

*

4

Montana

*

*

* *

4

California

*

--

*

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