Containing Government Growth

January 9, 2015

Summary

This act is intended to contain the growth of Arkansas government by limiting government expenditures from year to year to the growth in inflation plus population. In addition, there will be revenue limits restricting the raising of taxes. This method alone will not change the appropriations and budgeting process, but rather responsibly limit the total number of expenditures. This bill will prevent policy makers from increasing state spending that does not reflect voters’ willingness to pay for government services.[1] Over 30 states have passed similar measures.[2]

In effect, this limit gives the people of Arkansas control on how much they want government to spend, and the legislators remain in control on what to spend the money on. It would prevent government from spending away everything it brings in, and will return extra revenue back to the people.

This is a responsible limit because it addresses the need to contain the growth in government expenditures, as well as addressing the needs in providing services to a growing population and changing value of the dollar. A working formula would look as follows:

Expenditure Limit = Previous Year Expenditures + (Previous Year Expenditures x (Inflation + Population Growth))

Inflation – means the percentage change in CPI in the United States Bureau of Labor Statistics Consumer Price Index (CPI) for South Region, all items, all urban consumers, or its successor index.

Population Growth – means the annual federal census estimates for Arkansas and such number shall be adjusted every decade to match the federal census.

The power to change this limit should be placed in the hands of the people rather than legislatures. Legislatures have incentives to continue government growth and spending by providing loopholes, exemptions, and special considerations that would undermine the limit. Measures that legislators can work around do not restrain spending.[3]

A comparable constitutional amendment was passed in Colorado in 1992 known as the Taxpayer Bill of Rights. That bill provided taxpayer refunds in 1997-2000 of over $2.3 Billion to the people of Colorado.[4] A simulation shows that if a similar formula had been enacted in 1980, Arkansas would have spent over $120 Billion LESS between 1980-2008. (Tax Foundation, TABOR calculator).

An ideal bill for Arkansas should contain the following provisions:

  • Growth in government expenditures limited to inflation plus population growth.
  • Any revenue collected over the limit goes immediately back to the taxpayers, and all tax increases have to be approved by a vote of the people.
  • When transferring government programs the overall limit must be reduced down accordingly.
  • Supermajority vote of legislature or popular vote of the people to change the limit or raise/change any taxes.

 

Introduction

Over 30 states have enacted some type of tax or expenditure limit (TELs).[5] TELs place a limit on how much taxes, revenues, or expenditures can increase in a state each year.[6] There are various types of TELs and no two are the same. The states change and adapt them for each state. The most common types of TELs include limitations based on (1) inflation + population growth, (2) Personal Income Growth, (3) Share of Income, (4) a Fixed Number, or (5) some variation of these.[7][8]

Effectiveness of TELs

TELs passed by initiative are more restrictive and contain fewer loopholes than those enacted by state legislatures.[9] TELs that limit government spending to the inflation rate plus population growth and mandate immediate rebates of government surpluses are more effective at limiting government expenditures than are other TELs.[10] This in turn creates incentives to cut taxes when it appears that revenues are going to exceed the limit. TELs that allow legislatures to increase the limit or work around them in some way do not restrain spending.[11] TELs that limit growth to the growth in state income is associated with slightly smaller budgets in low-income states, but is associated with larger budgets in high-income states.[12] TELs built as “some share of income” “have no statistically significant impact on either state-only spending or stand-and-local spending.”[13] TELs at a fixed number result in higher budget growths.[14]

Characteristics that tend to have more of an impact on keeping spending down include: (a) extra-legislative adoption, (b) constitutional codification, (c) a supermajority or public vote requirement for overrides, (d) a provision that automatically and immediately refunds surpluses in excess of the limit, and (e) prohibition on unfunded mandates to the local levels.[15]

Some research advocates that TELs are not effective at actually reducing government spending.[16] That conclusion is made because of the level of significance measured, and because of how TELs are structured.[17] At least one report states there is no statistical significance between states that have TELs and those that do not.[18] A measure was statistically significant if it was at least 5% of a difference.[19] Even though few states met that 5%, small percentages out of billions of dollars spent would still be significant to others. Most TELs do reduce per capita expenditures, but the ones that use formulas and calculations that included extra measures beyond just inflation plus population growth did not see much reduction in the growth of government expenditures. Many states enact TELs structured to allow them to say to constituents that they are reducing government growth, while actually allowing for them to spend more.

The “Anti-Tel” research advocated other measures to limit government expansion that include (1) increase competition among bureaus, (2) forcing state and localities to compete with each other, and (3) allow bureaus to compete for budget dollars in the provision of given services.[20] Zycher states that “TELs will be unable to substitute for the hard work of long-term public education and persuasion about the central benefits of reduced government spending.”[21] However, it seems like that advice coupled with a strict TEL like Colorado’s TABOR and described in the summary would help towards more economic freedom for Arkansans.

TEL Calculator

A “TEL Calculator” has been developed by the Tax Foundation to show how a certain TEL would impact a certain state over a certain period of time. There are options to apply differing styles of TELs to the same data. The TEL calculator can be found at http://interactive.taxfoundation.org/tabor/ .

Arguments For TELs

TELS are generally supported by those advocating smaller government and less spending such as conservatives and libertarians. This includes the national group Americans for Prosperity, and the CATO Institute’s support for TELs limited to inflation plus population growth. Common arguments in favor of TELs include[22]:

  • Enhance the stability of the policy environment;
  • Assure state residents that taxes will not rapidly increase unless a majority is in favor of change;
  • Make government more accountable;
  • Force more discipline over budget and tax practices;
  • Make government more efficient;
  • Control the growth of government;
  • Enable citizens to vote on tax increases and determine their desired level of government service;
  • Force government to evaluate programs and prioritize services;
  • Raise questions about the advisability of some functions provided by state government;
  • Help citizens feel empowered and result in more taxpayer satisfaction;
  • Help diffuse the power of special interests.

Arguments Against TELs

TELs are generally opposed by those advocating larger government and more spending such as liberals and those interests benefiting from more government spending. Interests that rely on government funding and subsidizing generally do not support TELs.  Bell Policy Center is a leading advocate against TELs, specifically those like Colorado’s TABOR. Common arguments in opposition to TELs include[23]:

  • Shift fiscal decision making away from elected representatives;
  • Cause disproportional cuts for non-mandated or general revenue fund programs;
  • Make it harder for states to raise new revenue;
  • Cause a “ratchet-down” effect where the limit causes the spending base to decrease so that maximum allowable growth will not bring it up to the original level;
  • Result in excess revenues that are difficult to refund in an equitable or cost-effective manner;
  • Result in declining government service levels over time;
  • Fail to provide enough revenues to meet continuing levels of spending in hard economic times;
  • Shift the state tax base away from the income tax to the more popular (but regressive) sale tax if voter approval is required.
  • Does not allow local municipals to raise taxes and spend more if those constituents with for that
  • Increase in Health Care Services will reduce other services proportionally

Case Study: Colorado

Colorado’s TEL, the “Taxpayer Bill of Rights” (TABOR) is perhaps the most well-known TEL. It is praised by limited government supporters and demonized by big government advocates. TABOR was a constitutional amendment approved by the people of Colorado in 1992 that “limits revenue growth for state and local governments and requires that any tax increases be approved by the voters of the affected government.”[24] The expenditure limit was set at inflation plus population growth. Specifically, voter approval was required for (1) tax rate increases, (2) imposition of new taxes, and (3) increases in property tax assessment ratios.[25] Also, TABOR explicitly prohibits implementation of new or increased (1) Real Estate Transfer Taxes, (2) Local Income Taxes, (3) State Property Taxes, and (4) State Income Tax Surcharges.[26]

“Without any voter-approved adjustments to the limit, the TABOR cap ensures that state revenue growth will remain below the rate of economic growth in the state.”[27] TABOR also prevented creation of “Rainy Day” funds, with the excess revenue over 3% going back to the voters.[28] Emergencies require a supermajority vote of the legislature, and are general limited to natural disasters.

TABOR provided taxpayer refunds in 1997-2000 of over $2.3 Billion to the people of Colorado.[29]

In 2005, the people of Colorado approved a Referendum that basically “suspended” TABOR for five years. This allowed the state to take in all raised revenue with no rebates to the people, and exceed spending limits.[30] This allowed the state to keep over $1.3 Billion that would have returned to taxpayers as rebates.[31]

Colo. Const art. 10, §20

Colorado’s Taxpayers Bill of Rights (TABOR)

Colorado’s Taxpayers Bill of Rights (TABOR), with Annotations

Case Study: Utah

Utah passed a TEL by legislation back in 1989 that would set an expenditure limit at inflation plus population growth plus the growth in personal income.[32] In 2004, the limitation removed the growth in personal income from the limit.[33] This made the limit more restrictive and began “limiting the growth in state spending to the relatively low percentages of population growth and inflation.”[34] Utah’s bill did not appear to include provisions for refunds to the public when the spending limit was not met. This aspect incentivized legislators to spend more. So, those differences became smaller as more spending occurred. In 2004 there was $150 million below the spending limit, $88 million below in 2005, $50 million below in 2006, and then estimated for just $9.5 million below the limit.[35] In addition, there were numerous programs and funds exempt from the expenditure limit including public education, debt service expenditures, emergency expenditures, Rainy Day Fund, Education Rainy Day Fund, one-time project cots for capital developments, Centennial highway fund restricted account, and transportation investment fund.[36]

Utah’s change to keep the limit at inflation plus population growth was good, but the numerous exemptions and lack of refunds show the effects likely to occur – a lack of better containing government growth. A provision that would refund those large sums of money would incentivize tax breaks to avoid the refunds or provide the actual refunds back to the people. Making sure the bill included practically all government expenditures within the limit would avoid re-classifying expenditures to avoid the limit.

Utah Code Ann. §63J-3-101-402

Utah TEL

Case Study: Ohio

Ohio passed a TEL through the legislature in 2006. Their version would limit government expenditures by either inflation plus population growth or 3.5%, whichever is greater.[37] This means that there is a guaranteed spending increase in government of at least 3.5% per year, regardless of any other factors. The Ohio bill also included a provision that excess revenues brought in above the expenditure limit would go into a “rainy day” fund up until it is 15% of the budget, and only then would refunds be distributed out to the people of Ohio.[38] Also, it did not put the power of tax increases in the hands of voters, and so if there are any new constitutionally mandated spending increases into the fiscal legislation, the TEL becomes null and void.[39] The bill does not limit tax increases.[40]

Ohio’s bill shows that changing the formula and other attributes just slightly can affect the actual goal of containing government growth. This law could allow for an increase in expenditures even during periods of deflation and population reduction, although it will keep government from growing at a larger pace than 3.5% a year, it may do little in true containment of growth. A better solution would be like the one proposed in the summary that is more kin to the Colorado TABOR bill. The TEL proposal in Ohio “provides incentives to the legislature and those who benefit from public spending to budget the entire “guaranteed” maximum increase in public spending of 3.5%.

Ohio Rev. Code Ann. §131.55-60

Ohio TEL

Sources

Hill, Edward, Ph.D., Matthew Sattler, Jacob Duritsky, Kevin O’Brien, and Claudette Robey. A Review of Tax Expenditure Limitations and Their Impact on State and Local Government In Ohio. Issue brief. Cleveland: Cleveland State U – Maxine Goodman Levin College of Urban Affairs, 2006. Web. 6 Jan. 2015. <http://urban.csuohio.edu/publications/center/center_for_public_management/tel31806.pdf>.

Kinnaird, Andrew, and Cameron Smith. Exploring a Constitutional Expenditure Limit for Alabma. Rep. Birmingham, AL: Alabama Policy Institute, 2013. Print.

McGuire, Therese J., Ph.D., and Kim S. Rueben, Ph.D. THE COLORADO REVENUE LIMIT: The Economic Effects of TABOR. Issue brief. Washington DC: Economic Policy Institute, 2006. Briefing Paper. Web. 5 Jan. 2015. <http://www.epi.org/publication/bp172/>.

Mitchell, Matthew., Ph.D. TEL IT LIKE IT IS: Do State Tax and Expenditure Limits Actually Limit Spending? Working paper no. 10-71. Washington DC: Mercatus Center – George Mason U, 2010. Web. 2 Jan. 2015. <http://mercatus.org/sites/default/files/publication/TEL%20It%20Like%20It%20Is.Mitchell.12.6.10.pdf>.

New, Michael J., Ph.D. “Limiting Government Through Direct Democracy: The Case of State Tax and Expenditure Limitations.” Policy Analysis 420 (2001): 1-17. Cato Institute. Web. 2 Jan. 2015. <http://www.cato.org/publications/policy-analysis/limiting-government-through-direct-democracy-case-state-tax-expenditure-limitations>.

Patton, W. David, Ph.D. “Hitting the State Spending Limit.” Policy Perspectives 2.11 (2006): 1-6. Center for Public Policy and Administration – University of Utah, 20 Dec. 2006. Web. 6 Jan. 2015. <http://www.imakenews.com/cppa/e_article000718531.cfm?x=b11,0,w>.

“TABOR Bill with Annotations.” N.p., 13 July 2011. Web. 6 Jan. 2015. <http%3A%2F%2Fwww.colorado.gov%2Fcs%2FSatellite%3Fblobcol%3Durldata%26blobheader%3Dapplication%252Fpdf%26blobkey%3Did%26blobtable%3DMungoBlobs%26blobwhere%3D1251726086092%26ssbinary%3Dtrue>.

“The Taxpayer’s Bill of Rights (TABOR).” TABOR Text. N.p., n.d. Web. 2 Jan. 2015. <http://www.douglasbruce.com/ECO/ECOcontent.php?it=85>.

Waisanen, Bert. State Tax and Expenditure Limits. Issue brief. National Conference of State Legislators, 2010. Web. 2 Jan. 2015. <http://www.ncsl.org/research/fiscal-policy/state-tax-and-expenditure-limits-2010.aspx>.

Washington, Emily, and Frederic Sautet, Ph.D. Tax and Expenditure Limits for Long-Run Fiscal Stability. Issue brief no. 61. Washington DC: Mercatus Center – George Mason U, 2009. Mercatus On Policy. Web. 2 Jan. 2015. <http://mercatus.org/publication/tax-and-expenditure-limits-long-run-fiscal-stability>.

Zycher, Benjamin, Ph.D. State and Local Spending: Do Tax and Expenditure Limits Work? Rep. Washington DC: American Enterprise Institute, 2013. Web. <https://www.aei.org/wp-content/uploads/2013/05/-state-and-local-spending-do-tax-and-expenditure-limits-work_152855963641.pdf>.

Endnotes

[1] Washington at p.1

[2] Zycher at p.1

[3] Washington at p.2

[4] New at p.12

[5] Zycher at p. 1

[6] New at p. 3

[7] Waisanen at p.2

[8] Mitchell at p.22

[9] New at p. 3

[10] Id.

[11] Washington at p. 2

[12] Mitchell at p. 22

[13] Id.

[14] Id.

[15] Id. At 23

[16] Zycher at p.1

[17] Id. At 20

[18] Id.

[19] Id.

[20] Id. At 46

[21] Id.

[22] Waisanen at p.4

[23] Id.

[24] Id.

[25] McGuire at p.2

[26] Id.

[27] Waisanen at p.4

[28] Id.

[29] New at p.12

[30] Waisanen at p.5

[31] Washington at p.3

[32] Patton at p.1

[33] Id.

[34] Id.

[35] Id. at p. 3

[36] Id.

[37] Hill at p.39

[38] Id. at p.40

[39] Id.

[40] Id.

 

 What Other States are Doing

State Tax and Expenditure Limits 2010
State Year Adopted Constitution or Statute Type of Limit Main Features of the Limit
Alaska 1982 Constitution Spending A cap on appropriations grows yearly by the increase in population and inflation.
Arizona 1978 Constitution Spending Appropriations cannot be more than 7.41% of total state personal income.
California 1979 Constitution Spending Annual appropriations growth linked to population growth and per capita personal income growth.
Colorado 1991 Statute Spending General fund appropriations limited to the lesser of either a) 5% of total state personal income or b) 6% over the previous year’s appropriation.
1992 Constitution Revenue & Spending Most revenues limited to population growth plus inflation. Changes to spending limits or tax increases must receive voter approval.
2005 Referendum Revenue & Spending Revenue limit suspended by voters until 2011, when new base will be established.
2009 Statute Spending Revised general fund appropriations limit to remove the 6% of prior year appropriations alternative, while retaining a limit based on 5% of total state personal income.
Connecticut 1991 Statute Spending Spending limited to average of growth in personal income for previous five years or previous year’s increase in inflation, whichever is greater.
1992 Constitution Spending Voters approved a limit similar to the statutory one in 1992, but it has not received the three-fifths vote in the legislature needed to take full effect.
Delaware 1978 Constitution Appropriations to Revenue Estimate Appropriations limited to 98% of revenue estimate.
Florida 1994 Constitution Revenue Revenue limited to the average growth rate in state personal income for previous five years.
Hawaii 1978 Constitution Spending General fund spending must be less than the average growth in personal income in previous three years.
Idaho 1980 Statute Spending General fund appropriations cannot exceed 5.33% of total state personal income, as estimated by the State Tax Commission. One-time expenditures are exempt.
Indiana 2002 Statute Spending State spending cap per fiscal year with growth set according to formula for each biennial period.
Iowa 1992 Statute Appropriations Appropriations limited to 99% of the adjusted revenue estimate.
Louisiana 1993 Constitution Spending Expenditures limited to 1992 appropriations plus annual growth in state per capita personal income.
Maine 2005 Statute Spending Expenditure growth limited to a 10-year average of personal income growth, or maximum of 2.75%. Formulas are based on state’s tax burden ranking.
Massachusetts 1986 Statute Revenue Revenue cannot exceed the three-year average growth in state wages and salaries. The limit was amended in 2002 adding definitions for a limit that would be tied to inflation in government purchasing plus 2 percent.
Michigan 1978 Constitution Revenue Revenue limited to 1% over 9.49% of the previous year’s state personal income.
Mississippi 1982 Statute Appropriations Appropriations limited to 98% of projected revenue. The statutory limit can be amended by majority vote of legislature.
Missouri 1980 Constitution Revenue Revenue limited to 5.64% of previous year’s total state personal income.
1996 Constitution Revenue Voter approval required for tax hikes over approximately $77 million or 1% of state revenues, whichever is less.
Montana* 1981 Statute Spending Spending is limited to a growth index based on state personal income.  * In 2005 the Attorney General invalidated the statute, and it is not in force at this time.
Nevada 1979 Statute Spending Proposed expenditures are limited to the biennial percentage growth in state population and inflation.
New Jersey 1990 Statute Spending Expenditures are limited to the growth in state personal income.
North Carolina 1991 Statute Spending Spending is limited to 7% or less of total state personal income.
Ohio 2006 Statute Spending Appropriations limited to greater of either 3.5% or population plus inflation growth.  To override need 2/3 supermajority or gubernatorial emergency declaration.
Oklahoma 1985 Constitution Spending Expenditures are limited to 12% annual growth adjusted for inflation.
1985 Constitution Appropriations Appropriations are limited to 95% of certified revenue.
Oregon 2000 Constitution Revenue Any general fund revenue in excess of 2% of the revenue estimate must be refunded to taxpayers.
2001 Statute Spending Appropriations growth limited to 8% of projected personal income for biennium.
Rhode Island 1992 Constitution Appropriations Appropriations limited to 98% of projected revenue (becomes 97% July 1, 2012).
South Carolina 1980 1984 Constitution Spending Spending growth is limited by either the average growth in personal income or 9.5% of total state personal income for the previous year, whichever is greater. The number of state employees is limited to a ratio of state population.
Tennessee 1978 Constitution Spending Appropriations limited to the growth in state personal income.
Texas 1978 Constitution Spending Biennial appropriations limited to the growth in state personal income.
Utah 1989 Statute Spending Spending growth is limited by formula that includes growth in population, and inflation.
Washington 1993 Statute Spending Spending limited to average of inflation for previous three years plus population growth.
Wisconsin 2001 Statute Spending Spending limit on qualified appropriations (some exclusions) limited to personal income growth rate.

Source: National Conference of State Legislatures, 2010