NCPA - National Center for Policy Analysis

Institutions and State Spending

July 20, 2012

U.S. fiscal policy at the federal, state and local level is on an unsustainable path. Although reformers look for ways to reduce spending on particular budget items, tomorrow's legislatures may easily reverse these cuts. In contrast, a change in the rules that govern the political process -- the "institutions" that shape a budget -- can have a lasting effect on spending for years to come.

To this end, researchers Matthew Mitchell and Nick Tuszynski of the Mercatus Center have investigated various institutional measures on the state level, measuring their comparative effectiveness at checking the growth of unsustainable spending. Of the 16 measures that they studied, 11 of them were found to have a substantial impact on reducing per capita spending.

The following were found to be the most effective measures:

  • State and local expenditures per capita in 2008 averaged approximately $5,708.
  • Separate spending and taxing committees limit legislators' ability to increase revenues for niche expenditures, and was found to result in $1,241 less in per capita spending.
  • The item-reduction veto allows a governor to write in a lower amount for a specific spending category; the power is present in 12 states, and results on average in $471 less spending per capita.
  • Centralized spending authority places greater responsibility on a single group of lawmakers, thereby encouraging frugality, and resulting in $199 less spending per capita.
  • By limiting the legislature's ability to borrow from future generations, strict budget-balancing requirements limit the size of spending, resulting in $184 less spending per capita, on average.
  • Requiring a legislative supermajority for tax increases reduces the ease with which lawmakers can increase revenues, and results in an average of $151 less per capita spending.
  • Completing a new budget annually, as opposed to doing so only every other year, reduces the returns to lobbying efforts, decreasing spending an average of $119 per capita.

In addition to these six, the following are other measures that were also found significant in reducing spending: explicit spending limits, line-item vetoes in divided governments, removing automatic shutdown provisions for when the legislature fails to produce a budget, and having a smaller state senate. These experimental institutions should offer some insight for federal reform efforts.

Source: Matthew Mitchell and Nick Tuszynski, "Institutions and State Spending," Independent Review, Summer 2012.

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