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The Fiscal Case against Statehood: Accounting for Statehood in New Mexico and Arizona

Author(s):Moussalli, Stephanie
Reviewer(s):Norcross, Eileen

Published by EH.Net (February 2014)

Stephanie Moussalli, The Fiscal Case against Statehood: Accounting for Statehood in New Mexico and Arizona. Lanham, MD: Lexington Books, 2012. xii + 221 pp. $85 (cloth), ISBN: 978-0-7391-6699-4.

Reviewed for EH.Net by Eileen Norcross, Mercatus Center, George Mason University.

“…[M]uch of human history…is recorded only in the accounts.” In the Introduction to The Fiscal Case against Statehood: Accounting for Statehood in New Mexico and Arizona, Stephanie Moussalli, professor of accounting at Rhodes College, invites the reader to see the historical ledgers of governments not as sterile tallies and reckonings, but as the language of political, social and human action. The accounts reveal the choices voters make through their elected representatives determining how they are governed. Does regime change deliver what proponents imagined?

Treating government accounts as potentially more revealing than written narrative, Moussalli tackles the fiscal history of New Mexico and Arizona between 1880 and 1930 – the period during which these southwestern territories became states. Her research considers two questions. The first is one of political economy. Does increased state sovereignty unleash greater spending? The Leviathan hypothesis of public choice theory holds that as government increases its power, absent constraints, it will use its broader taxing and spending powers to maximize revenues. Whether regime change due to war, or post-revolutionary government triggers Leviathan has been tested in earlier work. Moussalli adds the event of statehood to the list. The second question is focused on public administration and accounting. Does statehood improve government accounting and thus accountability to the public?

She finds the answer to both of these questions is yes. New Mexico and Arizona experienced a dramatic “Leviathan effect” when they transitioned from territories to states in 1912. One benefit of bigger government was better accounting.

In Part I, Moussalli tests the statehood Leviathan effect using Nevada, which saw no regime change during this period, as a control. Statehood was a contentious topic for New Mexicans and Arizonans in the late nineteenth century. Statehood opponents feared the expense. Arizona’s mining and railroad companies, and New Mexico’s lumber barons anticipated higher taxes. Some residents worried the loss of federal subsidies would require greater local revenues. Government reformers believed statehood would eliminate corruption via the professionalization of government. Both pro-and anti-statehood factions agreed that statehood would increase spending. They also agreed that fiscal restraints would be required of the new government to ensure spending discipline.

According to public choice theory, statehood in the U.S. federalist context should lead to two opposing changes. Greater sovereignty unleashes Leviathan and spending. Greater fiscal decentralization injects competition and spending discipline. Which effect dominates?

Moussalli finds that upon statehood, the “fiscal bite,” or the percent of the economy dedicated to government increased dramatically. In Arizona, it increased by more than one-third to 0.52 percent of the economy and in New Mexico the effect was a doubling to 0.69 percent of the economy. Nevada had a steady fiscal bite of 0.55 percent of the economy throughout the period. The new states took in more revenues than what was lost in subsidies.

Part II considers whether statehood ushered in better accounting. Given that statehood for Arizona and New Mexico coincided with the Progressives’ drive for bureaucratic professionalism, Moussalli’s task is to isolate the factors that may have contributed to accounting improvements. At this point, Moussalli dives into a literature void. There are no studies of statehood’s effect on accounting or of “frontier accounting.” Her method is to compare the financial reports of Arizona, New Mexico, and Nevada between the 1880s and 1930 to the contemporary Comprehensive Annual Financial Reports (CAFRs) of state governments. Her effort pays off, overturning the received wisdom that modern accounting standards date to the Progressive era. A good number of the early records include a type of Management Discussion and Analysis (MD&A), now required in CAFRs. The MD&A is intended to give the reader an objective, easy-to-understand analysis of the government’s financial position. These “proto-MD&A” narratives identified by Moussalli were not written in the clinical style preferred today. Auditors and accountants used these pages to express opinions and indignation, to ask for raises, or to dabble in policy analysis on spending and social issues, sometimes in colorful terms. Contemporary readers may cringe at such editorializing by auditors and accountants as crossing the bounds of professionalism, but Moussalli views these narratives as helpful insights from those most familiar with the books, “adding value to public discussion.”

Chapters 8, 9 and 10 analyze how improved accounting brings light to murky transactions and the back-door deal making of government officials. In the early statehood years, accountants “at the service of Leviathan” pushed for full value tax assessments (to the chagrin of taxpayers) to end the abuse of unequal assessments and erratic collections by corrupt local sheriffs. For a period, both states complied. Other improvements: better classification of funds, the end of the use of interfund transfers to inflate revenues or expenditures and the disentangling of debt from revenues and expenditures.

The Fiscal Case against Statehood leaves the reader with challenges for future research. Statehood for New Mexico and Arizona created a “punctuated equilibrium” effect resulting in a sustained increased level of spending. Controlling for changes in the regional and national economies, inflation, and Progressive-era reforms, Moussalli notes the findings aren’t easily generalizable. Can the same effect be observed in Hawaii and Alaska a half century later? The accounts, ranging in quality from “excellent to scandalous” are mute on some important questions. Own source revenues were not broken out in territorial records making it difficult to test fiscal illusion hypotheses. Her most provocative claim is that better accounting helps Leviathan, giving the state the technical tools and data to pursue greater spending.

By illuminating a sparsely populated field, Moussalli shows that financial reports, budgets, audited reports and tax assessments can augment and challenge the written record. “People say one thing, and do another.”  Based on her pioneering analysis one might argue that government financial records are “public policy” stripped of romance, laying bare the rhetoric and promises of politicians. Daunting and difficult work, Moussalli demonstrates that historical accounting scholarship rewards the diligent and creative scholar willing to stay on the trail.

Eileen Norcross is Senior Research Fellow at the Mercatus Center at George Mason University where she specializes in state and local finance. Her current research centers on public pensions and questions of municipal and state financial solvency including a forthcoming chapter on Alabama’s pension systems to be published in Spring 2014.

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Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre WWII