NCPA - National Center for Policy Analysis

Tax and Expenditure Limitations

February 10, 2004

Significant budget shortfalls now confront most states after more than a decade of uncontrolled spending growth. Had increases in spending been limited to the rate of increase in inflation and population, states would have saved $93 billion -- twice the size of today's state budget deficits, according to economists Lew Uhler and Barry Poulson.

Many policy makers have recently expressed interest in adopting constitutional tax and expenditure limitations (TELs). Originally, TELs were devised under Governor Ronald Reagan in 1972, after enduring a decade where state government spending grew by 160 percent, dwarfing both the combined increases in population and inflation as well as personal income growth.

Though improvements have since been made to such policies, many of the key features of TELs remain the same:

  • Annual increases in expenditures should be limited to the growth in inflation and population.
  • Tax revenues that are in excess of allowable expenditures must be refunded to the people as soon as possible.
  • A fund equal to 0.2 percent of the state personal income should be set aside for emergencies.
  • Limits should be imposed on local property tax rates so that local governments cannot fill expenditure gaps created by the state.

Uhler and Poulson conclude that a TEL is not a substitute for other methods of fiscal restraint on state spending, such as gubernatorial veto, impoundment or rescission authority, and sunset laws. Instead, a TEL should be regarded as an effective tool to compliment existing policies so as to ensure proper financial discipline.

Source: Lew Uhler and Barry Poulson, "State Budget Problems Lead to Renewed Interest in TELs," Budget & Tax News, January 2004, and the Heartland Institute, January 1, 2004.

 

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