While the academic literature suggests that TELs and STVRs can be effective in reducing state tax burdens and spending, some states with tax limitations appear to be fiscally and economically troubled. Might the experience of such states as California, Mississippi and Nevada indicate that however positive the average result of STVRs and TELs can be, there could be considerable risk?[*]
Mississippi is America’s poorest state in terms of per-capita personal income, and in September, Nevada had the nation’s highest unemployment rate. California’s state government has logged significant fiscal deficits in recent years.
Mississippi has a three-fifths supermajority requirement in the state Legislature for new taxes. It is unclear, however, that this requirement is related to the state’s poverty. Mississippi has been relatively poor for decades; it was ranked as the poorest state in America, for example, in 1936. The state’s three-fifths supermajority mandate did not begin until 1970, a year in which Mississippi was again the poorest state.
Nor is there an apparent connection in Nevada. Until the Great Recession, Nevada had one of America’s lower unemployment rates. In 2006, Nevada’s annual average unemployment rate was 4.2 percent, below the U.S. average. This was 10 years after adopting a two-thirds supermajority tax vote mandate. Moreover, from 2000 to 2010, the population of Nevada grew more quickly than that of any other state.
California’s budget dynamics are complex. In the 2006 study “State Budgetary Processes and Reforms: The California Story,” authors Juliet Musso, Elizabeth Graddy and Jennifer Grizard suggested that a counterproductive reaction may have followed the tax limitations in Proposition 13 of 1978 and a subsequent constraint on state spending growth in Proposition 4 of 1979.
Referring to a 2005 state tax and spending proposal, the authors remarked, “The history of California initiatives suggests that such stricter [tax and spending] strategies may spawn additional measures to create protected budgets (e.g., [a 1988 proposition on schools]), earmark funding sources (e.g., [1988, 1998 and 2002 propositions on cigarette taxes and fuel taxes]), or relax the limitations that begin to constrain spending (e.g., [a 1990 transportation proposition]).” They further observe, “The revenue restrictions of Proposition 13, coupled with restrictions on spending authority contained in other measures, have constrained state and local fiscal flexibility.”
Nevertheless, the authors do not place the principal blame for California’s budget dysfunctions on Proposition 13:
We argue that the primary procedural norms violated by the California budgetary process are those of comprehensiveness, unity, periodicity, clarity, and publicity. The installation through the initiative process of constitutionally mandated formulas, and the existence of protected funds and off-budget departments has seriously eroded the comprehensiveness and unity of the budget process.
Among the plausible concerns over Proposal 5 is that special interests will rush to enshrine guaranteed spending or spending growth into the state constitution. With a strict tax limitation in place, factions that want to ensure their subsidies or grants are not cut in the future may introduce ballot initiatives that mandate higher spending. Under this scenario, such initiatives could press spending upward even as Proposal 5 restricted revenue growth, leading to unbalanced budgets.
This worst-case scenario does not seem unavoidable, however. Michigan has tax and spending constraints in the Headlee Amendment, and these have not led to a series of constitutional spending mandates. The three-quarter supermajority vote requirement for raising the state education property tax hasn’t done so either. Consider, for instance, Proposal 5 of 2006, a citizen initiative to mandate in the Michigan Constitution that spending on public schools, community colleges and state universities go up annually by at least the rate of inflation. Despite the popularity of public education in Michigan and the seemingly modest indexing of education spending to inflation, the proposal failed by a decisive margin.
Nor is it clear that constitutional spending constraints and mandates are the root of California’s budget problem, a point made in a 2009 analysis by Reason Foundation analysts Shikha Dalmia, Adam Summers and Adrian Moore. The primary spending mandate in the California state budget is that 40 percent of the state budget be dedicated to primary schools, secondary schools and community colleges. As the Reason analysts note, however, a 2003 study by John G. Matsusaka of the University of Southern California calculated that California legislators hands were tied in only a third or less of California’s state appropriations, while a 2009 review by the state’s nonpartisan Legislative Analyst’s Office concluded, “Despite these restrictions, the legislature maintains considerable control over the state budget — particularly over the longer term.”
Indeed, the 40 percent spending mandated by the education spending initiative was similar to the state’s typical spending levels before passage of the initiative, and the figure represents roughly the median percentage of state general fund spending on primary and secondary education among the 50 states. In other words, the mandate, however wise or unwise, does not appear to have placed an excessive burden on state lawmakers.
The Reason analysts instead focused on California voters’ decision in 1990 to exempt certain transportation spending from a state spending increase cap established in 1979. Summers, in a separate Reason Foundation analysis in April 2009, concluded that had the original spending limit been observed, the state would have realized a $15 billion surplus in 2009 rather than a $42 billion deficit. If Californians abandoned a spending limit and caused an imbalance in state budgets, the problem may be less the presence of tax and spending constraints than the absence of them.
The question of whether a particular state’s voters will demand spending discipline probably depends on factors other than the presence of a supermajority tax increase requirement. Such a requirement is one that many states have adopted without experiencing California’s budget problems.
[*] For instance, supermajority tax requirements have been characterized as “proven to ruin economies” in both Mississippi and Nevada, and California has been held up as a cautionary example. See “Bipartisan Group Forms To Fight Two Thirds Proposal,” MIRS Capitol Capsule, July 26, 2012. See also Ron Fisher and Rob Wassmer, “Approving Proposal 5 sure path to deficits and debt,” The Detroit News, Oct. 18, 2012, http://goo.gl/IQK27 (accessed Oct. 23, 2012).