By Megan Davies
NEW YORK (Reuters) - Tax-cutting measures in a handful of states looked to gain traction following Tuesday's elections, potentially weakening fiscal positions if revenues fail to keep pace with spending.
Republican governors triumphed in key races, riding a partisan tide that will give them control of the Senate. Policies proposed by some of those governors were aggressive about cutting taxes.
"As far as states go there was a clear message that people would rather have lower taxes," said Craig Brandon, Co-Director of Municipal Investments at Eaton Vance in Boston, adding that there was a theme of states aiming to fix budget gaps by restructuring pensions but not by increasing taxes.
Lowering taxes to improve the local business environment and stop entrepreneurs from deserting states with high costs can cause concern among investors when it starts to impact a state's financial position.
In Kansas, governor Sam Brownback prevailed after a bruising battle which focused on his aggressive tax slashes. The state is a minor player in the municipal debt market, but has been interesting because it shows how doing what is seemingly popular is not a sure winner.
The tax cuts triggered a Standard & Poor's credit score downgrade in August and polls in local media showed Brownback trailing rival Democrat Paul Davis who promised to end the incumbent's "experiment." Brownback squeaked through, defeating Davis by 49 percent to 47 percent, according to preliminary results.
In another tight race, Republican businessman Larry Hogan won Maryland, a surprise in a traditionally left-leaning state. Taxes had been a central part of Hogan's campaign and his website claimed the current Maryland administration has imposed over 40 tax hikes that "we don't need, don't want, and can't afford."
"The question we always ask is, if (states or governors) are putting forward a proposal to cut taxes, we want to know how they will pay for that, will it spur enough economic growth that will offset the revenues," said Peter Hayes, Head of BlackRock's Municipal Bonds Group.
In Illinois, which has the most underfunded retirement system among U.S. states with a $100 billion uncovered pension liability, Republican opponent Bruce Rauner knocked out incumbent Democratic governor Pat Quinn.
Quinn had wanted to turn a temporary income tax rise enacted in 2011 into a permanent one, which some investors supported. However Rauner had made suggestions on pensions that pleased other investors.
The electorate also showed their minds were on their purse strings when weighing ballot initiatives, voting in Tennessee to amend the constitution to ban a tax on earned personal income and payroll and in Georgia to support a constitutional amendment capping the state's income tax rate.
Still, in California, voters put their weight behind Democratic Governor Jerry Brown, who has turned around the state's finances after years of deficits and even got a tax rise passed in 2012.
"In the rest of the country, they're going in a slightly different direction," Brown was reported by the Los Angeles Times as saying. "In California, we are going to go in, I think, a very progressive but fiscally responsible direction."
(Reporting by Megan Davies; Editing by James Dalgleish)