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February 2012 Policy Study, Number 12-2

   

TABOR: A Pro-Growth Solution for Iowa

by John Hendrickson

   

 

Introduction

   

 

The United States has suffered severely from the impact of the “Great Recession.” High unemployment (8.5 percent) is still a major issue confronting policymakers at all levels of government. “Bloated state spending levels and trillions of dollars in unfunded liabilities pose huge financial obstacles to economic recovery in the fifty states.”[1] The economic downturn also represents the high-water mark of government spending, out-of-control pension funds, and potential bankruptcy unless states across the nation implement serious reforms to their tax and spending policies. Governors and Legislatures across the nation have led the way with implementing free-enterprise solutions to economic problems.

 

Governor Chris Christie of New Jersey, Governor Rick Perry of Texas, Governor John Kasich of Ohio, and Governor Scott Walker of Wisconsin, among others, have led the way in reforming state government by applying limited-government principles to public policies. States such as Texas are doing well because of the free-enterprise policies that have led to economic growth and job creation. Writing in Forbes, columnist Charles Kadlec argued that “the path to jobs and prosperity lies in increasing the liberty of the American people by reducing the burden of government spending, taxes, borrowing and regulations on individuals and businesses, big and small.”[2] The Tax Foundation stated that “states with the best tax systems will be the most competitive in attracting new businesses and most effective at generating economic and employment growth.”[3]

 

States that have low tax rates, low levels of government spending, and prudent levels of taxation will be centers of economic growth. States with a simple and fair tax code are more business-friendly. “The ideal-tax system — whether at the local, state, or federal level — is simple, transparent, stable, neutral to business activity, and pro-growth.”[4] During the last legislative session in Iowa, Legislators considered some tax-reform ideas which included a 20 percent across-the-board income tax reduction and cutting the 12 percent corporate income tax rate in half. Both of these policies would have been pro-growth and led to a more pro-business tax code.

 

The American Legislative Exchange Council’s (ALEC) fourth edition of Rich States, Poor States, which examines the economic competiveness of the states, argues that both individuals and businesses are influenced by a state’s economic climate:

 

We have argued in these reports that American workers, families, and businesses are repelled by high taxes, overspending, and excessive regulation. Still many policymakers and pundits remain unconvinced…Now we have powerful confirmation of the impact bad state economic policies have on the vitality of states. The confirmation comes from one of the most unimpeachable sources: the U.S. census. The 2010 census data tracks population trends among the 50 states. These numbers tell us a significant amount of information about which states and regions are prospering and which are suffering from economic decline. The new data confirms an unmistakable migration pattern over the past decade: the higher the taxes and the tighter the government chokehold on the state economy, the more likely people are to pack up their bags and leave — or for those outside the state, to stay away.[5]

 

States that have high levels of taxation, regulation, and poor fiscal records will not do well in attracting people and businesses to their states. States are in competition with each other in order to attract both businesses and families, which means that states must pursue policies that will achieve economic growth as well as provide excellent educational opportunities. In addition, states are in competition with the increasing globalization of the economy with nations such as China and India.

 

States that pursue a policy agenda that is rooted in tax, spending, and regulatory reduction will be better served by creating a stronger and more competitive economy. This truth can be applied to the national policy as well as demonstrated by the periods of economic growth during the 1920s and 1980s when limited-government policies were utilized by Presidents Warren G. Harding, Calvin Coolidge, and Ronald Reagan. Economic policies that follow in the tradition of constitutional limited-government and supply-side economic theory will result in prosperity. The solution cannot be a continuation of massive spending (including generous entitlements and pensions), taxation, and regulations.

 

In order to resolve unemployment and create economic growth at the state level, many states will have to follow in making the hard, but prudent, decisions of cutting tax rates, reducing spending, and eliminating unnecessary regulations. Many Governors across the nation are leading in implementing limited-government policies, but many states are still following the progressive agenda of raising taxes and increasing spending. The Wall Street Journal recently reported that “Moody’s downgraded Illinois state debt to A2 from A1, the lowest among the 50 states.”[6] The Wall Street Journal noted that “Governor Pat Quinn and his fellow Democrats raised individual income taxes by 67 percent and the corporate tax rate by 46 percent” in order to raise more revenue.[7] The result of this policy has not been good for the Illinois economy nor has it solved the state’s fiscal problems. The Wall Street Journal also referenced that Moody’s “praised” the budget reforms initiated in Wisconsin by Governor Scott Walker, who has done the opposite of Illinois.[8]

 

Reforming state budgets and tax rates will not be an easy process as witnessed by the massive progressive protests that fiscally conservative Governors have faced in Wisconsin, Ohio, and New Jersey, but a number of reforms can be utilized to restore fiscal prudence and economic growth. To rein in the budget, state policymakers need to consider the following questions related to priority-based budgeting:

 

•What is the role of government?
•What are the essential services the government must provide to fulfill its purpose?
•How will we know if government is doing a good job?
•What should all this cost?
•When cuts must be made, and how will they be properly prioritized?[9]

 

Chris Edwards, Director of Tax Policy Studies at the Cato Institute, wrote that some economic reforms states could consider include “abolishing corporate income taxes, privatizing government activities, trimming public-sector compensation, and reforming public-sector labor laws.”[10] Some additional recommendations offered by the Cato Institute include to “resist accepting federal grants-in-aid and limit the growth in state government by instituting a stringent constitutional tax and expenditure limitation.”[11]

 

Enacting a constitutional tax and expenditure limitation amendment is a pro-growth economic tool that will not only help restrain the Legislature from increasing taxes and spending, but will also provide citizens with the responsibility to decide important fiscal questions of increasing taxes or spending. Tax and expenditure limitations (TELs) may require a supermajority vote in the Legislature or approval by the voters before a tax or spending increase can be approved. Although several states have some form of a tax and spending limitation or balanced budget requirement in their respective constitutions, one of the more successful endeavors has been Colorado’s Taxpayers Bill of Rights or TABOR measure.

 

   

 

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