Structure of State-Level Tax and Expenditure Limits------6
do not rebase, and the second set of seven states being those that do rebase. Column 3 and
4 report the TEL caps and actual appropriations (i.e. revenues or expenditures subject to the limit). Column 5 reports the TEL ‘‘Slack’’ or the difference between actual appro- priations and the estimated limit. The ﬁnal column reports the percentage increase in actual appropriations for the next ﬁscal year before the TEL for this past ﬁscal year were to be binding. In other words, holding the TEL cap constant, how much more could be appropriated in the next ﬁscal year or biennium before the current TEL cap was reached. On average, the rebasing states could increase their current appropriations by 36 percent. Some states could double their appropriations (e.g. South Carolina), and with the ex- ception of Arizona, Indiana, Maine, and Oregon, all the remaining states could increase their appropriations by more than 26 percent before the TEL cap was binding. The rebasing states on the other hand can only increase their appropriations by 7 percent in the next ﬁscal year or biennium. Ohio’s TEL ‘‘Slack’’ is the largest, and that’s because the state does not rebase annually but would be expected to recast its TEL in 2012. Therefore, for states with a true rebasing element, they can only increase their appropriations by approximately 4 percent in the next ﬁscal year or biennium. For these states, the limits exert a downward pressure on revenues or expenditures subject to the limit.
What we ﬁnd is that while the ﬁscal growth factor is an important consideration, we still have to consider the percentage of general fund revenues or expenditures subject to the limit as well as how states estimate their appropriation limits. Those that rebase their
limits will trend closely with actual revenues, while those that do not rebase will not trend closely with actual revenues, and a variance that is likely to occur during an economic downturn will magnify if the state does not reset its base.
aThe data is from the most recent budget documents, comprehensive annual ﬁnancial reports, or speciﬁc TEL reports. Seven states are not reported here. This includes the ﬁve states that estimate their TEL caps as a percent of estimated revenues (see Tables 1 and 3), Wisconsin and North Carolina. For these ﬁve states, actual appropri- ations are generally equal to the TEL cap; as such, the TEL slack is zero or negligible. For Wisconsin, their biennial report includes the biennial estimated TEL limit and annual expenditures subject to the limit, but not biennial estimated expenditures subject to the limit, making comparisons difﬁcult. There are no published reports for North Carolina. Also note that Tennessee and Montana both exceeded their TEL limits.
bAlso see Table 2 note i.
TREATMENT SURPLUS FUNDS AND OVERRIDE PROVIISONS
The surplus funds stipulation, in most cases, allows for the transfer of excess revenues to a reserve fund, refunding taxes once reserves are at the statutory or constitutional cap (see Table 2). While excess funds within the general fund can be appropriated in the following ﬁscal year, these funds are generally also subject to the spending cap. In a few states, revenues in excess of the limit must be immediately refunded to taxpayers (e.g., Colorado and Massachusetts)Fthis is the most stringent treatment of surplus funds. Scholars implicitly assume that the TELs are binding, especially when discussing the refund of revenues requirement. However, in most instances the limits are not binding, making the issue of surplus revenues irrelevant (see Table 4). Moreover, the refund requirement is second to establishing sufﬁcient reserves.92
In FY 1996–1997 through FY 2000–2001 Colorado refunded more than $3.25 billion, California refunded more than $1.1 billion in FY 1986–1987,93 while taxpayers in Mas- sachusetts received $16 of the $29 million that was to be refunded a year after voters approved the limit (FY 1986–1987). In Michigan, actual state revenues subject to the limit have exceeded the revenue limit on three different occasions (FY 1994–1995, FY
1998–1999, and FY 1999–2000); however, the amounts in excess of the limit did not exceed the 1 percent threshold and no refunds were made by the state. Missouri, on the other hand, has refunded excess revenues to taxpayers on three separate occasions. In
1998, the state revised the revenues subject to the limit and did not issue any refunds thereafter even though a refund was declared in 1998 and 1999.94
Override provisions are requirements that a state legislature has to satisfy in order to appropriate above the limit. In most states the override provision requires a super majority vote to override the limit, while in a few states, an emergency has to be declared by the governor and all appropriations above the limit have to be approved by a
92. A number of states do not have any explicit provision for the treatment of revenues in excess of the limit. Table 2 only identiﬁes provisions for the treatment of revenues in excess of the limit that are outlined in the constitutional or statutory language of the TEL. It therefore excludes statutory and constitutional provisions for the treatment of any excess revenues in the general fund as a whole or any statutory and constitutional provisions for the state’s budget stabilization funds. Therefore, if a state has not explicitly stated its treatment of surplus revenues in its TEL language that does not mean that it doesn’t have speciﬁc provisions elsewhere.
93. California’s limit initially also required all funds in excess of the limit to be refunded. An un- anticipated surge in revenues caused primarily by taxpayer reaction to the Tax Reform Act of 1986, pushed the states revenues over the appropriations limit. As a result, the state refunded more than $1.1 billion in FY 1986–1987. Prop. 111 amended the refund requirement with only 50 percent of all revenues in excess of the limit being returned by a revision of tax rates or fee schedules within the next two ﬁscal years. All other funds in excess of the limit are to be used to fund K-14 education programs (see Article XIIIB SEC. 2).
94. The Missouri Supreme Court ruled that the state had correctly revised its state tax revenues subject to the limit and no refund was due to taxpayers as funds were transferred to the Conservation Fund, and these funds were not subject to the refund requirement (see State Auditors Report, State of Missouri at //www.auditor.mo.gov/press/2008-06.htm).
74 Public Budgeting & Finance / Summer 2011
supermajority vote of the legislature. In a number of states, these measures explicitly exclude emergencies due to changes in economic conditions and revenue shortfalls. Maine95 and Michigan,96 for example, require all appropriations above the limit to result from measures that are beyond legislative control (e.g., catastrophic events, unfunded or underfunded mandates, citizen initiatives or referenda, court orders, and loss of federal funding), with all appropriations above the limit approved by the legislature in a separate measure. It is also expected that these appropriations will not increase the base used to calculate the appropriation limit in the next ﬁscal year, which prevents any permanent increases in the appropriation limit. California’s97 constitutional limit, for example, re- quires the legislature to reduce appropriations over three ﬁscal years to avoid permanent increases in the state’s budget. Voters, through a referendum, can appropriate above the limit. Utah98 and Alaska,99 for example, allow for voter approval of any appropriations in excess of the limit. In a few states, a majority vote will sufﬁce: Indiana’s expenditure limit only requires the general assembly to speciﬁcally exempt appropriations from the state spending cap in clear and unambiguous language in the appropriation bill. In Tennessee, a simple majority vote has enabled the state to override its limit on 14 different occasions (FY 1979–1980 through FY 2007–2008).100 In most instances, there are no explicit provisions as to appropriations above the limit. However, as we have noted in much of this discussion, TELs in most states are nonbinding, and as a result, very few states have exercised override provisions.101
THE RATCHET EFFECT OF THE TELSFROLE OF BSFS
In a simulation of a spending rule that, in its rudimentary form, is a TEL, Schunk and Woodward found that the states could maintain more than $98 billion or 20 percent of spending in their RDF, and an additional $108 billion in one-time capital spending or tax relief.102 In their simulation, the authors assumed that in order to calculate a spending limit for the next ﬁscal year, a state would use the appropriation limit established in the prior ﬁscal year (i.e., nonrebasing, or Equation 3). If there were any excess funds, they would be distributed across three funds: a RDF, a one-time spending capital projects fund,
95. 5 M.R.S. 1534 (3).
96. MCLS Const. Art. IX, 27.
97. Cal Const, Art. XIII B (c) (1).
98. Utah Code Ann. 63J-3-204.
99. Alaska Const. Article IX 16.
100. Burns Ind. Code Ann. 4-10-21-7.
101. In some instances, the Tennessee legislature approved appropriations above the limit that were more than 15 percent (or $703 million) of the original budget. Over the years, Tennessee has appropriated more than $3.25 billion in excess of the constitutional and statutory provisions. (see Tenn. Code Ann. 9-4-
102. D. Schunk, and D. Woodward, (2005). Spending Stabilization Rules: A Solution to Recurring
Budget Crisis. Public Budgeting and Finance (Winter), 105–124.
Kioko / Structure of State-Level TELs 75
and a temporary tax relief fund (in order of priority). In the event of a revenue shortfall, the spending rule would reset at the lower base for the next ﬁscal year (i.e., rebasing, or Equation 2). In the meantime, the state would be allowed to draw down on its RDF to balance its budget in the ﬁrst year; thereafter, the state would be required to adjust to a new spending level in order to avoid drawing down on its reserves for a second year. The TELs do not cause nor can they prevent the ‘‘ratcheting effect,’’ but rather, as Schunk and Woodward demonstrate, various provisions with in the TEL laws could provide the in- stitutional mechanisms necessary to accumulate and maintain reserve funds that could be used to maintain spending during an economic downturn. In fact, TELs are simply re- strictions on growth in spending as they prescribe a spending maximumFas often times, growth in government revenues far exceeds the TEL ﬁscal growth factor.
Moreover, the refund requirement, and not the rebasing element of the TELs, un- dermines the state’s ability to cope with revenue shortfalls. Colorado’s TABOR, for example, not only requires all funds in excess of the cap to be refunded to taxpayers but also strictly prohibited the use of any reserve funds in the event of a ‘‘ﬁscal’’ emer- gency.103 And although the state had a statutory general fund reserve balance (4 percent of appropriations, or approximately $1 billion), it had dedicated these funds to meeting its refund requirement before the economic downturn.104 Had the state retained the
$3.25 billion, the state would have had sufﬁcient funds to maintain constant dollar spending during the economic downturn.105 While voters approved Referendum C, a measure that suspended the refund provision for ﬁve years (2005–2010), the measure did not provide for a ﬁscal emergency reserve fund. We should expect the refunds to resume in FY 2011 as growth in its nonexempt revenues far exceeds the state’s population-plus- inﬂation ﬁscal growth factor.106 History will more likely repeat itself in the case of Colorado, if the state does not maintain reserve funds that could be tapped in the event of an economic downturn.
This study provides a discussion of the structural features of the TEL focusing on those features that are most effective at controlling growth in spending over the long run. It presents an outline of the constitutional and statutory provisions of TEL laws and
103. Even though the TABOR does require the state to maintain a reserve equal to 3 percent or more of its ﬁscal year spending, it limits these emergencies to ‘‘physical’’ (e.g., natural disasters) rather than ‘‘ﬁscal’’ emergencies (Colo. Const. Art. X, Section 20 (2) (c) and Section 20 (5)).
104. FY 2000–2001 refund was $927 million (see ‘‘Rainy Days in Colorado: Do We Have the Right Umbrella?’’ available from //www.coloradobudget.com/RDF_Report_Bighorn_Interiors.pdf: accessed June 18, 2010).
105. If Colorado had retained the $3.25 billion, it would have been sufﬁcient to meet the difference between non-exempt revenues for FY 00-01 of $8.9 billion and FY 01-02 ($7.8 billion), FY 02-03($7.7 billion), FY 03-04($8.3 billion), & FY04-05($8.5 billion).
106. See //www.colorado.gov/dpa/dfp/sco/cafr/cafr09/cafr09stats.pdf, p. 238–239.
76 Public Budgeting & Finance / Summer 2011
interpretation and implementation of TEL laws across the states. Such a discussion has been lacking in this literature. Moreover, much of the empirical work assumes that the mere presence of a TEL should have an impact on spending. However, as this study shows, it is the structure of the limit, rather than its mere existence, that determines if the TEL has any effects at all. While the ﬁscal growth factor is an important consideration, we still have to consider the percentage of general fund expenditures subject to the limit as well as how states estimate their appropriation limits. This study found the consti- tutional and statutory language of how states calculated their appropriation limits would, over time, restrict the effectiveness of the TEL. If a state’s objective is to control growth in spending, it has to estimate its limit using actual appropriations for the pre- ceding ﬁscal year. If a state does not set a new base either annually (e.g., Colorado), after four years (e.g., Ohio) or after a revenue shortfall (see Schunk and Woodward’s 2005 simulation), the state’s appropriation limit would reﬂect cumulative changes to a base when the TEL was ﬁrst approved. The rebasing element of a TEL eliminates any slack in the authorized limit, especially after an economic downturn.
On its technical merits, Colorado’s TABOR is still one of the most stringent TELs to date. The TABOR’s coverage is broad, its ﬁscal growth factor signiﬁcantly restricts growth in spending, its rebasing requirement eliminates any ‘‘slack,’’ and its voter ap- proval requirement to override the TABOR curtails legislative discretion. However, stringency alone does not necessarily yield optimal outcomes; for example, the TABOR prohibits use of any reserve funds for ‘‘ﬁscal’’ emergencies. Moreover, there has been no discussion about what is the appropriate level of growth in government spending. In most instances, the ﬁscal growth factor is likely to be procyclical, i.e., stimulating spending when the underlying economic factors are robust. In other instances, the ﬁscal growth factor could lead to very modest changes in spending (for example, 1.3 percent in Colorado). This might be the case if states estimated their ﬁscal growth factor over a short time period (e.g., one to three years). To correct for this, some states average growth over a longer period of time (e.g., 6 years in Indiana and 10 years in Washington and Maine), while others have established ﬁscal growth factor ﬂoors (e.g., 3.5 percent in Ohio) and caps (e.g., 6 percent in Indiana). However, a discussion about the appropriate level of growth in spending should be at the forefront of any discussion about TELs.
TELs are not a universal remedy for uncontrolled spending. Even though they are intended to curtail discretion over growth in spending, much of the language in the TEL laws is ambiguous and subject to misinterpretation and/or manipulation. For example, a vast majority of the TEL laws do not expressly prohibit reclassiﬁcation of any general fund spending, nor do they provide adjustments to the appropriation limit if expendi- tures are reclassiﬁed off-budget. What is more, there are no mechanisms by which others can judge the outcomes of TELs.107 Our survey found comprehensive reports, including a list of exempt and nonexempt revenues or expenditures, in two statesFMichigan and
107. See A. Corbacho, and G. Schwartz, ‘‘Fiscal Responsibility Laws,’’ in Promoting Fiscal Discipline, eds. M. S. Kumar and T. Ter-Minassian(International Monetary Fund, 2007, pp. 58–105).
Kioko / Structure of State-Level TELs 77
Missouri.108 For the majority of states, limited reporting on TELs was incorporated in the state’s CAFR (e.g., Alaska, Colorado, and New Jersey) or budget documents (e.g., Arizona and Utah), while in a few states, the estimated appropriation limit and total expenditures subject to the limit was reported by a board or government agency charged with such responsibilities (e.g., Arizona, Florida, Washington, and Wisconsin). In most instances, reporting focused on the estimated ﬁscal growth factor, and in a vast majority of the states there were no reports detailing exempt and nonexempt revenues or expen- ditures. This perhaps reﬂects a general perception that TELs are soft rules that should guide spending and not necessarily hard constraints intended to curtail legislators’ dis- cretion over spending decisions.109 Moreover, TELs (and other ﬁscal institutions, e.g., BBRs and debt limits) do not impose any sanctions for noncompliance on the govern- ment, nor do they impose any reputational and electoral costs on the legislators. There- fore, efforts to comply with such laws are likely to dwindle over the long run.
The author expresses sincere thanks to Biff Jones for excellent research assistance; Craig L. Johnson, William Duncombe, and two anonymous reviewers for their invaluable comments on an earlier draft of this manuscript. As usual, any errors or omissions are my own.
108. See audit reports from Michigan (//www.michigan.gov/documents/budget/Section_26_
277353_7.pdf) and Missouri //www.auditor.mo.gov/press/2008-06.htm (accessed June 3, 2010).
109. X. Debrun, D. Hauner, and M. S. Kumar, ‘‘Fiscal Discipline: Key Issues and Overview,’’ in Promoting Fiscal Discipline, eds. M. S. Kumar and T. Ter-Minassian (International Monetary Fund, 2007, pp. 1–8).
78 Public Budgeting & Finance / Summer 2011
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