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Structure of State-Level Tax and Expenditure Limits------3

On occasion, states sought to relieve pressure by amending limits to exclude certain types of expenditures (e.g., property tax relief and capital spending); however, a majority of states had not sought authorizations to exceed their limits because they had not reached them in the ﬁrst place.27
This study seeks to broaden the discussion on why TELs have never been binding constraints. It summarizes ﬁndings from an extensive review of the constitutional and statutory provisions in all 31 states and ﬁnds that the interpretation and implementation of a state’s legal provision have overtime eroded the limits potency. That is, holding all political actions constant, the limits in a majority of the states do not reset their base

27. Howard (1989).

Kioko / Structure of State-Level TELs 49

annually, and their current limits reﬂect cumulative changes to a base that was estab- lished when the limits were ﬁrst approved. Thus, these limits fail to reﬂect any changes in the state’s ﬁscal and economic environment and as a result, the caps are signiﬁcantly greater than the states actual revenues or expenditures. It departs from much of the aforementioned work, by focusing on the interpretation and implementation of the laws across the states.

TECHNICAL STRUCTURE OF TAX LIMITS

The term ‘‘technical structure’’ in this study refers to the interpretation and application of statutory and constitutional rules. The methods used here are similar to Hou and Smith’s examination of balanced budget requirements (BBRs).28 In that study, the au- thors conducted extensive legal research of speciﬁc BBR provisions that led to the for- mulation of a framework of rules that are political and technical in nature. In proposing a framework that draws a distinction between political discretion and technical sub- stance, the authors argue that the political rules are ‘‘ambiguous’’ and ‘‘subject to cir- cumvention and manipulation,’’ whereas technical rules tend to be ‘‘straightforward, rigid, and more difﬁcult to circumvent’’ (p. 27). They argue that the addition of these technical rules ‘‘improves the explanatory power’’ of the institution (p. 35).
In line with the aforementioned, this study summarizes ﬁndings from an extensive survey of the constitutional and statutory provisions focusing on the technical provisions that stipulate how the limits are calculated and enforced (see Table 2 for constitutional and statutory sources). It examines ﬁnancial and budget reports that make evident the interpretation and implementation of the TEL laws.29 Table 2 below provides a summary of our ﬁndings. Although we do not provide any econometric estimates or a framework such as the one developed in Hou and Smith,30 we do believe the typology reported in Table 3 (discussion to follow) enhances our understanding of these TELs. In this study, we consider the technical provisions to be those used to determine revenues and expen- ditures subject to the limit, the ﬁscal growth factor, and the method of estimating the appropriation limit. While there are provisions for treatment of surplus revenues and use of the TEL override, these provisions in most instances require politicians to exercise some discretion, so we cannot consider these to be technical rules.

28. Y. Hou, and D. L. Smith, A Framework for Understanding State Balanced Budget Requirement
Systems: Reexamining Distinctive Features and an Operational Deﬁnition. Public Budgeting and Finance,
26, no. 3 (2006): 22–45.
29. If no TEL documents were publicly available, we attempted to contact the state’s budget ofﬁce to obtain additional information. In some instances we had to rely only on the laws.
30. Hou and Smith (2006).

50 Public Budgeting & Finance / Summer 2011

TYPES OF TELS

While traditionally TELs have been labeled as revenue limits, expenditure limits, ap- propriation limits, or a combination of the aforementioned, they fundamentally fall into either of these two categoriesF(a) general fund limits31 on revenues, expenditures, or appropriations, or (b) procedural limits that restrict the taxing authority of a govern- ment.32 General fund limits are dollar caps on the general fund while procedural limits require either voter approval33 or a legislative super-majority vote34 for higher or new taxes. The procedural limits represent a real constraint on the taxing authority and, unlike the general fund limits, are not part of the annual budgeting processes and are only applicable if the state seeks to levy higher or new taxes. This study focuses ex- clusively on how states determine their general fund limits.
Of the 32 general fund limits in 31 states, ﬁve states deﬁne their limitations on the basis of their revenues.35 In another 22 states, the states deﬁne their limitations on the basis of their expenditures.36 In much of the public ﬁnance literature, revenue limits are con- sidered to be limitations on the taxing authority of a government, while expenditure limits are controls on spending authority,37 but this distinction is superﬂuous. With the exception of the state’s choice of starting point, which is fundamental to crafting the limit, revenue limits and expenditure limits are operationally indistinguishable. To de- termine the limit, states are required to establish their base year general fund revenues or expenditures subject to the limit and adjust these base year revenues or expenditures with a factor of growth that is equal to personal income growth or population growth plus inﬂation.38 States can only exceed their limit if they exercise their override provision (a simple majority vote, legislative super-majority vote, or voter approval). Funds in excess of the limitation are refunded to taxpayers, deposited in a rainy day fund (RDF) or

31. The terms general fund limit and tax and expenditure limit are used interchangeably.
32. Also see K. J. Stark, ‘‘The Right to Vote on Taxes,’’ Northwestern University Law Review, 97 (2001): 191–251.
33. Includes Colorado, Florida (two-thirds of voters), and Missouri (requires a majority of voters for tax increase over $50 million or 1% of state revenues).
34. A three-fourths vote is required in Arkansas, Oklahoma, and Michigan; a two-thirds vote is required in Louisiana, California, Arizona, Washington, Nevada, and Oregon; and a three-ﬁfths vote is required in Mississippi, Delaware, South Dakota, and Kentucky.
35. They include Colorado, Florida, Massachusetts, Michigan, and Missouri. Louisiana’s revenue limit was repealed in 2001.
36. They include Alaska, Arizona, California, Colorado, Connecticut, Hawaii, Idaho, Indiana, Lou- isiana, Maine, Montana, North Carolina, New Jersey, Nevada, Ohio, Oregon, South Carolina, Tennessee, Texas, Utah, Washington, and Wisconsin.
37. Revenue limits have been treated as limitations on the taxing authority of the legislature and subsequently thought to limit a state’s ability to raise revenue or service debt. See C. L. Johnson and K. A. Kriz, ‘‘Fiscal Institutions, Credit Ratings and Borrowing Costs,’’ Public Budgeting and Finance 25, no. 1 (2005): 97 and J. M. Poterba and K. S. Rueben, ‘‘Fiscal News, State Budget Rules, and Tax-Exempt Bond Yields,’’ Journal of Urban Economics 50 (2001): 549.
38. Supra note 7.

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