February 2012 Policy Study, Number 12-2

TABOR: A Pro-Growth Solution for Iowa

by John Hendrickson

Colorado's TABOR Amendment

Historically, tax and spending requirements have been part of a larger debate over the role of state government. Proposition 13 in California, for example, was a historic revolt by taxpayers who demanded more accountability in state fiscal policy. However, even Proposition 13 in California, which did in fact help taxpayers, was not strong enough to implement a long-term solution to out-of-control tax and spending increases as evident by the state’s economy today. “For instance, most TELs have been enacted by state Legislatures, and it is not clear that Legislators have the incentive to reduce their autonomy by placing meaningful constraints on their own behavior,” noted economist Michael J. New.[12]

Even with balanced budget requirements, states still find ways to increase spending, which is one of the reasons many states are suffering in the current economic crisis.[13] State Legislatures often use maneuvers, shifting funds, relying on federal money, and other gimmicks to create their budgets:

One major flaw in state spending is that the Legislature, which is responsible for drafting state spending, rarely produces a balanced budget. While most states do have balanced-budget requirements, all too often state Legislatures also take advantage of accounting maneuvers that push expenses into future budgets, for example issuing specious and unsustainable bond programs.[14]

This has been a major problem for many states, including Iowa, but as Auditor of State David Vaudt recently stated, “there is only $53 million of one-time resource expenditure shifts occurring in Fiscal Year 2012.”[15] “The practice of shifting General Fund costs to one-time or limited-time resources has been significantly reduced in this budget. This represents a huge move toward fiscal sustainability — an encouraging sign,” stated Vaudt.[16] Iowa currently seems to be moving in the direction of implementing some reforms to the state budget, but more work needs to be done.

Public Interest Institute Research Analyst Deborah Thornton, who wrote the Policy Studies Tax and Expenditure Limits (TELs) Helping to Control Government Spending (August 2010) and Tax and Expenditure Limits II: Are There Additional Options? (March 2011), provides a thorough overview of TELs in the several states and their possible implications for Iowa.[17] The focus in this paper will be on the implications of TABOR and other pro-growth policies that are needed to produce sound fiscal policy and economic growth. TELs such as TABOR, which is considered one of the most aggressive measures, can be defined differently depending on the rules. Barry W. Poulson, who is a Professor of Economics and a leading expert in tax and spending limitation issues, defined TELs as:

budgetary rules that determine how much taxes and/or expenditures can increase from one year to the next. TELs can be statutory or constitutional rules. Statutory TELs can be modified by legislative action, while constitutional TELs can only be modified by a majority vote of citizens. TELs may originate through a legislative statute or referendum, or they may be initiated by citizens in states that provide for this form of direct democracy.[18]

Poulson also argues that to be successful a TEL must:

•be constitutional rather than statutory;
•limit the growth of government spending to inflation and population growth rather than other aggregate measures of economic activity;
•provide for immediate refunds of surplus revenue above the TEL limit;
•be linked to other budget rules, most importantly to balanced-budget requirements.[19]