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Policy Paper


One Solution, Many Formulas: How States are Solving the Tax and Spending Problem
NTU Policy Paper No. 122

September 19, 2006
By Kristina Rasmussen
By Sterling Whitehead

Introduction: Experimenting in the Laboratory of the States

While many critics of Colorado's Taxpayer's Bill of Rights (TABOR) heralded the 2005 voter-approved, partial suspension of the measure as a death knell for tax-and-expenditure limits (TELs) across the country, a resurgence of interest in modified controls is taking place. Instead of folding up camp and heading home (as many ill-wishers would have hoped), taxpayer activists went through the arduous process of collecting enough petition signatures so residents in four states – Maine, Montana, Nebraska, and Oregon – can vote on comprehensive spending limits at the ballot box this November.

Faced with this formidable burst of spending limit initiatives, opponents are seeking to halt the momentum behind the measures through "death by association" connections made to the "failed" measure in Colorado. The logic goes that residents in other states shouldn't bother to enact their own limits because voters in Colorado just set aside TABOR.

But taxpayers have no reason to be scared off by such nonsense. Aside from the fact that TABOR turned out to be a resounding success, everyone expects the laboratory of the states to generate concepts that other states will explore. That does not necessarily mean that new permutations are "copycats" worthy of instant condemnation. Rather, each state develops its own formulation that will function best in the economic and political climate that is peculiar to its environs. A review of the four ballot proposals demonstrates that while TEL advocates across the country clearly have been inspired by the goal of Colorado's TABOR to limit growth in government, they've also adapted their home-grown proposals to their state's situation and needs.

This natural process has numerous historical parallels. When Proposition 13 passed in California in 1978, activists in other states caught onto the property tax limitation idea and refined it to fit their own circumstances. That's how Massachusetts's Proposition 2-1/2 passed in 1980, and how Washington State's own limit was adopted some 20 years later. During this time span there were experiments with measures in Nevada, Maine, and elsewhere that blended the elements of Proposition 13.[a]

There's also a linkage between spending limits adopted in the past two and a half decades. While voters were enacting citizen initiatives in Michigan (the Headlee Amendment, 1978) and Missouri (the Hancock Amendment, 1980) that limited annual state revenues to specific percentages of residents' total personal income, numerous others came up with personal income-based tax- or spending-limit formulas during that time, including Arizona, Idaho, and South Carolina (which enacted them through legislative referendum).

Taxpayers are witnessing a similar phenomenon this year. While the various initiatives retain many elements that made Colorado's TABOR so useful, each proposal is clearly the product of distinctive fine-tuning. This Policy Paper explores the state-specific variations found within the current crop of TELs, and puts them in the context of Colorado's experience.

Spending vs. Revenue Limits

Adopted in 1992, Colorado's TABOR sought to "starve the beast" of big government primarily by limiting revenue growth. State government was allowed to keep and spend incoming revenue at a rate equal to last year's baseline adjusted for inflation and percentage growth in population. Incoming revenue beyond this point was refunded to taxpayers. In large part due to these strong guidelines, TABOR was instrumental in transforming Colorado's economy into one of the strongest in the nation.[b]

Even though TABOR focused on revenue limits, opponents seized onto the spending half of the budget equation in their 2005 campaign to suspend TABOR's basic spending mechanism for five years. Unfortunately, TABOR did not have required ballot question text for spending limit suspensions (even though it did have ballot language for tax or bonded debt increases), and opponents exploited this opening. The anti-TABOR crowd wailed about programs that would supposedly be hurt if voters failed to suspend TABOR, and this was reflected in the Referendum C ballot question wording that started off by saying:

WITHOUT RAISING TAXES AND IN ORDER TO PAY FOR EDUCATION; HEALTH CARE; ROADS, BRIDGES, AND OTHER STRATEGIC TRANSPORTATION PROJECTS; AND RETIREMENT PLANS FOR FIREFIGHTERS AND POLICE OFFICERS, SHALL THE STATE BE AUTHORIZED TO RETAIN AND SPEND…

Partly due to this shifted focus, local champions of new ballot proposals decided to concentrate instead on limiting government spending. While Maine's Taxpayer Bill of Rights initiative requires voter approval for state tax hikes, spending – not revenue – is the primary target. The formula may be different, but the goal of harnessing double-digit growth in state budgets is the same.[c]

Table 1. Name, Target, and Focus of the 2006 Tax and Expenditure Limits

State

Initiative Name

Focus

Target Level of Government

Target Limit

Maine

Taxpayers' Bill of Rights (TABOR)

statutory

state, local, & quasi-governmental

tax & spending

Montana

Stop OverSpending (SOS)

constitutional

state

spending

Nebraska

Stop OverSpending (SOS)

constitutional

state

spending

Oregon

Rainy Day Amendment (RDA)

constitutional

state

spending

Like Colorado's TABOR, all of the TELs under consideration this fall (with the exception of Maine, whose laws allow only initiated statutes) are constitutional amendments. This reflects that fact that while statutory spending caps can have some positive impact, elected officials can all-too-easily waive or ignore these limits. Oregon voters, for example, passed a statutory spending limit tied to personal income in 1980, yet legislators have been able circumvent the restrictions with budgetary gimmicks. Maine passed a weak state and local spending cap called L.D.1 in 2005, but it can be overridden by a simple majority of the Legislature. Montana had a weaker statutory spending cap in effect from 1981 until the state Attorney General nullified the law last year. For the most part, a stringent protection against runaway spending written into each state's foundational document was deemed necessary to ensure its common-sense rules were not abused.

The scope of this year's TELs has also largely been curtailed. The reach of Colorado's TABOR at the state, city, and county levels left its defenders facing numerous foes on all fronts, and the state-only focus of many of the current TELs is reflective of the desire to wage one battle at a time. Only Maine's TABOR would impact state, local, and quasi-governmental spending (including school districts).

Spending Limit Mechanics

Colorado's TABOR limited growth of revenue to account for inflation and population increases. The 2006 TELs likewise apply an "inflation + population" formula to state spending. The limit is not designed to radically slash funding for state services, but to keep the government's rate of growth at an affordable level. The stabilizing effect on the budget is twofold – first, politicians will not be able to spend recklessly in times of surplus, and second, the need to raise taxes during times of recession will diminish because spending obligations were kept at a sustainable pace.

Table 2. Spending Formulas and Methods for Exceeding Limit

State

Spending Limit

Ratchet

Method for Exceeding the Limit for Non-Emergencies

Maine

STATE: inflation + population

LOCAL: inflation rate added to the percentage change in property valuations or the percentage change in population (whichever is lower)

SCHOOLS: inflation plus the percentage increase in enrollment

no

STATE: 2/3 Legislature & majority of voters.

LOCAL: 2/3 legislative body & majority of voters

QUASI: governing body of agency & 2/3 of voters

Montana

inflation + population

no

majority of voters

Nebraska

inflation + population

no

2/3 Legislature & majority of voters

Oregon

inflation + population

no

2/3 Legislature & majority of voters

TABOR opponents in Colorado seized upon the so-called "ratchet-down effect" as proof that the revenue limit cut spending on government programs. While it is true that the base revenue limit dropped when revenues dipped during a recession (and then was adjusted for inflation plus population changes), it is simply false that Colorado's budget was drastically slashed by TABOR. In fact, total state spending went up every year since TABOR's inception. Regardless, opponents found a potent tool in the ratchet argument, and the 2006 TELs neutralized this perceived liability simply by not allowing such a mechanism to operate. State spending is either limited to last year's limit or the limit adjusted for population and inflation (whichever is greater). State budgets will still rise every year – but at a more prudent pace.

Giving voters more say in the budget process is at the core of the spending limit plans, and this is reflected in the 2006 round of TELs. If elected officials want to spend more than the reasonable spending rate in Maine, Nebraska, Nevada, and Oregon, they will have to convince a majority of voters and (and in some cases two-thirds of the Legislature) that raising the cap is the appropriate thing to do. Montana goes the furthest by making voters the sole arbiter of when the spending restriction can be exceeded. This may prove a wise move, given that last year the Montana Legislature voted against letting Montanans decide for themselves on the issue of a constitutional spending limit.

Budget Stabilization and Emergency Funds

Budget stabilization funds are among the clearest examples of enhancements adapted to deal with criticisms that programs will be shortchanged by economic slowdowns under spending limitations. Colorado's TABOR did create emergency reserves by holding back revenue for use in declared emergencies, but it did not have funds available to plug budget shortfall gaps. In response, many of the 2006 TELs call for a limited budget stabilization fund that can be filled with excess revenues and then used as a back-up source of funds in years when revenues fall short of the spending limit. While some states, such as Maine and Nebraska, have specific prescriptions for the management of the funds (e.g. when the funds should be filled, by what amount, and when those funds can be used), Oregon, and Montana provide more leeway on fund creation and management.

Table 3. Budget Stabilization Funds, Emergency Spending, and Revenue Increases

State

Budget Stabilization Fund

Emergency Spending

Provision on Revenue Increases

Maine

STATE: Maine Budget Stabilization Fund receives 20 percent of any surplus until total equals 10 percent of previous year's General Fund revenues

LOCAL: may create reserve account with surplus equal to 10 percent of previous year's expenditures

QUASI: may create 10 percent reserve account

no separately-stipulated fund, but can raise emergency taxes with approval of 2/3 of Legislature or local body, but use must be approved by voters at next election

2/3 of Legislature or local body plus majority of voters must approve increase (voter approval not required if existing revenue cannot cover payment of bonds, pensions, or court agreements, or if the tax hike applies to a quasi-government agency with no body of voters)

Montana

exempts money going to any newly-created reserve fund from spending limit

no fund, but relevant appropriations exempted from limit after 3/4 of Legislature declares emergency pursuant to law.

none

Nebraska

allows creation of budget reserve fund with ingoing amount limited to 12 percent of that year's state spending limit

no specific fund, but strictly defined emergency spending exempted from limit with 3/4 vote of Legislature

none

Oregon

exempts money going to rainy day fund from spending limit

exempts money going to emergency fund from spending limit

none

The fiscal sense of creating budget stabilization funds can be demonstrated by examining Oregon's budget situation over the past decade. Even as revenues soared in the 1990s, lawmakers doubled general fund spending but put nothing away for the recession that hit in 2001. The Rainy Day Amendment could have lessened the impact of this slump by having a budget stabilization fund available to accommodate future changes in Oregon's fiscal picture while still protecting taxpayers. In addition to reserves, the TELs in Montana and Nebraska provide separate emergency spending procedures. As mentioned earlier, Maine's TABOR takes into account revenue increases by requiring voter approval for tax hikes.

Refunds and Exemptions

The tax refunds created by Colorado's TABOR were wildly popular with voters for obvious reasons, and this aspect has been retooled for the current TEL amendments. Even though the primary focus is on limiting spending, the proposal in Maine has a provision for returning surplus revenues to taxpayers; 80 percent of all receipts that breach the cap would be remitted through a "Tax Relief Reserve Fund." Montana does not have a refund provision because past attempts to combine both spending and revenue limitation under the banner of "budgeting" have been knocked down by courts under a single-subject balloting rule.

All of the TELs exempt carefully-defined categories from the spending limit, most commonly including federal funds, voluntary gifts to the state, sale of property, and payment of interest and principal on previously-approved bonds. Some also exempt special endowment funds (including highway, education, and pension funds), thereby deflating the argument that transportation, school, and public employee spending will be "terminally threatened" by a spending limit. Montana's SOS has by far the most exemptions from the spending limit.

Notably, all of the initiatives make exceptions to the spending limit for money designated for tax relief. This is important because it protects taxpayers from governments that tend to portray tax relief as an "expenditure" that "costs" the state money. For example, Nebraska's SOS measure provides a special exemption for "moneys dedicated to pro-rata taxpayer relief or refunds" from the state spending cap, while Oregon's RDA excludes "money to fund tax and other refunds" along with money dedicated to income tax rebates known collectively as the "Kicker." Keeping tax refunds out of the spending cap will aid attempts to return hard-earned tax dollars to residents.

Table 4. Refund Process and Exclusions from Spending Limits

State

Specified Surplus Refund Process

Exclusions from spending limit

Maine

STATE: Tax Relief Reserve Fund receives 80 percent of surplus, and when fund exceeds $25 million, it is returned by temporary or permanent broad-based tax credits, rebates, or rate reductions

LOCAL: surplus reduces property tax in succeeding year

QUASI: if surplus exceeds 10 percent of limit, must make plans for a refund

1) refunds to taxpayers from designated fund; 2) federal funds; 3) amounts collected on behalf of another level of government; 4) pension contributions and fund earnings; 5) pension and disability payments; 6) grants and gifts; 7) court awards; 8) reserve transfers or expenditures

Montana

none

1) budget reserve funds; 2) emergency appropriations; 3) bond proceeds if payment of principal and interest is applied to spending limit; 4) payment of bond principal and interest on debt issued or incurred prior to January 1, 2007, and those incurred after if approved by voters; 5) federal funds; 6) money voluntarily donated; 7) proceeds from sale of property; 8) money for pro-rata tax rebates; 9) appropriations for user charge refunds or appropriations funded by user charges that reflect true cost of service; 10) income earned on permanent endowment funds and appropriations necessary to administer constitutionally created trusts (including public school fund, public retirement system, resource indemnity trust, coal severance trust, noxious weed management trust, tobacco settlement trust fund, highway revenues, special sessions of the Legislature, districting and apportionment, special levies on livestock and agricultural commodities for disease control and other purposes, counsel for consumer interests before public service commission, and constitutional conventions)

Nebraska

none

1) federal funds; 2) money voluntarily donated; 3) proceeds from sale of property; 4) pro-rata taxpayer relief or refunds; 5) appropriations funded by user charges or fees reflecting actual cost of service; 6) income earned on permanent endowment funds; 7) funds for budget reserve fund; 8) emergency funds

Oregon

none

1) emergency or rainy day funds; 2) federal funds; 3) money for the "Kicker" tax rebates; 4) tax and other refunds; 5) money voluntarily donated; 6) proceeds from sale of voter-approved bonds; 7) proceeds from sale of property

Ballot Intent, Severability, and Wording

Opponents of tax and spending limits have often turned to the courts for invalidation both before and after voters go to the polls. In order to stymie legalistic attempts to derail the common-sense limitations, two measures (Montana and Nebraska) have severability clauses that would prevent the entire amendment from being thrown out if only a particular section were found invalid, and almost all of the TELs make a point of stressing that courts should adhere to interpretations favoring limited government.

Table 5. Initiative Intent

State

Severability Clause

Intent Clause

Maine

none

yes: "it is the intent of the Legislature that this chapter be interpreted liberally to restrain excess growth of state and local government"

Montana

yes

yes: "it is the intent of the voters in passing [this amendment] that interpretations which better restrain growth in government spending are favored over interpretations which do not restrain such spending"

Nebraska

yes

yes: "it is the intent of the voters in amending this section that legal interpretations that restrain growth in government spending are favored over interpretations that do not restrain such spending"

Oregon

none

yes: "the purpose of this section is to limit the rate of growth of total spending by the state government"

As mentioned earlier, framing certainly matters when it comes to asking voters if they want to suspend spending/revenue limits, and Nebraska's amendment pre-determines the ballot question wording for lifting the spending limit. Nebraska's SOS provides voters the following voting options: 1) "I authorize the Legislature to exceed the State Spending Limit for [insert fiscal year] by [insert total amount of proposed fiscal year spending above the state spending limit]" or 2) "I do not authorize the Legislature to exceed the State Spending Limit."

Montana's and Maine's proposals provide clear boundaries for the contents of ballots asking voters to give up spending surpluses, while the Maine TABOR additionally stipulates the exact language for tax-hike referenda.

Conclusion

Even a cursory glance at the four TEL proposals analyzed in this paper shows that while they share the same goal of limiting runaway state spending, they vary greatly in detail and tools employed. The shift to spending limits, the elimination of the ratchet-down effect, and the creation of budget stabilization funds demonstrate how thoroughly the measures have been crafted to address common concerns. Furthermore, voters who support tax relief can wholeheartedly endorse these plans because of revenue refund procedures and limits on new or additional tax hikes.

At the end of the day, the concepts behind tax and expenditure limitations are hardly radical. More than a dozen states feature voter approval or legislative "supermajority" mechanisms in their tax policies, and roughly two dozen states limit all or part of their budget increases to economic measurements such as inflation or personal income growth. The voters of Maine, Montana, Nebraska, and Oregon can go to the polls on November 7 with the confidence that the proposals before them will help to restore fiscal sanity in their states.

Notes


[a] See, for example. Pete Sepp, "Rising Property Taxes Fuel Taxpayer Revolts," Budget & Tax News, August 1, 2005, http://www.heartland.org/Article.cfm?artId=17540. For a comparative historical reference, see U.S. Advisory Commission on Intergovernmental Relations, Significant Features of Fiscal Federalism, Volume 1: Budget Processes and Tax Systems, Table 6, "Description of State Tax and Expenditure Limits," (Washington, DC: ACIR, 1994).

[b] See "What Taxpayers Should Know about Colorado's TABOR" at http://www.ntu.org/main/page.php?PageID=86.

[c] Read the full text of the initiatives at:

Colorado: http://www.i2i.org/Publications/ColoradoConstitution/cnart10.htm

Maine: http://www.taxpayerbillofrights.com/Language/tabid/55/Default.aspx

Montana: http://www.sosmontana.com/pages/petition.html

Nebraska: http://www.sos.state.ne.us/elec/petitions/americans%20for%20limited%20government.%20amendment.pdf

Nevada: http://www.npri.org/TABOR_TASC/TASC_text_html.htm

Oregon: http://egov.sos.state.or.us/elec/web_irr_search.record_detail?p_reference=20060006..LSCYYY.