Consequences of ConstitutionalRevenue and Spending Limits

La Follette School Conference on Taxing and Spending Limits in Wisconsin

January 19, 2005

Andrew ReschovskyRobert M. La Follette School of Public Affairs

University of Wisconsin-Madison

reschovsky@lafollette.wisc.edu

2

What is the Taxpayer Bill of Rights?

A constitutional amendment which would: Limit increases in state, school,

county, and municipal spending by placing a set of rules (or formulas) in the constitution

Require referenda for exceeding spending limits, for any tax changes that cause net revenue gains, and for most borrowing decisions.

3

But, Government Spending Hasn’t Grown Any Faster than

the Economy Over the Past Decade

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

28.0%

30.0%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Fiscal Year

Sta

te a

nd

Lo

cal G

ove

rnm

ent

Sp

end

ing

Rel

ativ

e to

P

erso

nal

Inco

me

State & Local Spending as a Percent ofPersonal Income

4

Alternative Ways that TABOR Could Limit the Growth of Public

Spending 2005 Assembly Joint Resolution (Lasee/Wood):

Growth in state spending Inflation (CPI) + population growth

Growth in K-12 education spending Inflation (CPI) + % change in enrollment

Growth in county and municipal spending Inflation plus % change in property tax base due to new

construction Senate proposal (July 2004)

Growth at all levels of government limited to 90 percent of growth rate of state personal income

5

Predicting the Impact of TABOR on Government

Spending

No one can predict the future with certainty

My approach is to ask:

If TABOR had been implemented in 1985, how much would

governments be allowed to spend today compared to actual spending?

6

The Impact of TABOR (Assembly) on

State Government Spending

0.0

5.0

10.0

15.0

20.0

25.0

30.0

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Fiscal Year

Sta

te G

ove

rnm

ent

Sp

end

ing

in B

illio

ns

of

Do

llars Actual State Spending

TABOR Allowable Spending

7

If TABOR Was Enacted 20 Years Ago, Which State Programs Would

Disappear?

FY 2003 spending was $25.5 billion TABOR limit would have been $17.1

billion To eliminate $8.4 billion in spending one

could eliminate all General Fund spending on K-12 education, on the UW System, and on Shared Revenue, and still would need to reduce spending by $1.5 billion

8

State Spending Relative to Income

With and Without TABOR (Assembly)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Fiscal Year

Actual Spending Relative to Income

TABOR Allowable Spending Relative to Income

9

The Impact of TABOR (Senate) on

State Government Spending

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Fiscal Year

Sta

te G

ov

ern

me

nt

Sp

en

din

g i

n B

illi

on

s o

f D

oll

ars

Actual State Spending

TABOR Allowable Spending

10

Will Lower Spending Lead toCuts in Public Services?

Evidence from other states shows that property tax limits have led to a decline in education quality Careful research conducted on impacts of

Proposition 13 (CA) and Proposition 2½ (MA) “A growing body of research is producing a

consistent conclusion; imposition of tax and expenditure limits results in long-run reductions in the performance of public school students.” (Downes and Figlio, National Tax Journal)

11

Will Lower Spending Lead toCuts in Public Services? (cont.)

Since TABOR passed in 1992, public services have declined in Colorado (No rigorous econometric research yet, but plenty of circumstantial evidence) State support for higher education (relative

to income) has fallen by 55% The proportion of low-income children

without health insurance nearly doubled in CO, while it declined for the nation as a whole

Lots of funding cuts in the health area

12

Why Might Public Services Decline Even Though TABOR Allows

Spending to Grow?

Costs (the minimum amount of money needed to provide a given level of public service) are likely to rise faster than the constitutionally-imposed limit

But, why?

13

Why Might Public Services Decline Even Though TABOR Allows

Spending to Grow? (cont.)

Costs may rise faster than limits because To attract teachers and health care

professionals requires wages that reflect productivity growth in the private sector, thus over time public sector salaries must grow faster than the inflation rate

Other input costs often rise faster than the CPI & personal income, e.g. heating fuel, health insurance premiums

14

Why Might Public Services Decline Even Though TABOR Allows

Spending to Grow? (cont.)

Costs may rise faster than limits because Aging population will increase the costs of

providing health care, especially Medicaid-funded long-term care costs

To reduce its deficit, the federal government will shift more costs of services to state and local governments

Evidence that NCLB is a seriously under-funded mandate

Proposals to limit federal Medicaid spending

15

Why Might Public Services Decline Even Though TABOR Allows

Spending to Grow? (cont.)

As Dr. Knickman has indicated, as long as health care spending goes up faster than the limits, TABOR will force cuts elsewhere in the budget, with the most likely cuts in

K-12 education Higher education Environmental protection Public safety Social services

16

The Impact of TABOR (Assembly Version) on School District Spending

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Fiscal Year

Actual Expenditures

TABOR Allowable Expenditures

17

The Impact of TABOR (Assembly) on Spending in the Manitowoc

School Distr.

$-

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

1984

-85

1985

-86

1986

-87

1987

-88

1988

-89

1989

-90

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-200

0

2000

-01

2001

-02

2002

-03

2003

-04

School Year

Sp

end

ing

(in

mill

ion

s o

f d

olla

rs)

Spending (in millions of dollars)

"TABOR" Allow able Spending + Referenda

18

The Impact of TABOR on Education in Manitowoc

MPSD is a relatively low spending, low tax rate district 2003-04 per pupil spending of $8,186 is about

2% less than average of K-12 districts 2003-04 property tax mill rate of 7.91 is nearly

20% below average TABOR will penalize district’s past frugality Infusion of Southeast Asian immigrants

will raise the costs of education, adding to fiscal pressure

19

The Impact of TABOR on Spending in the Madison Metro

School District

$-

$50

$100

$150

$200

$250

$300

School Year

Sp

end

ing

(in

mill

ion

s o

f d

olla

rs)

Spending (in millions of dollars)

"TABOR" Allow able Spending + Referenda

20

TABOR (Assembly) Would Have Been More Restrictive than the

Revenue Caps

$-

$50

$100

$150

$200

$250

$300

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-2000

2000-01

2001-02

2002-03

2003-04

School Year

Sp

end

ing

(in

mill

ion

s o

f d

olla

rs)

Spending (in millions of dollars)

"TABOR" Allow able Spending + Referenda

21

The Impact of TABOR onOutagamie County Spending

-

10

20

30

40

50

60

70

80

90

100

Fiscal Year

Sp

en

din

g (

in m

illio

ns

of

do

llars

)

Total General Expenditures

TABOR Allow able Expenditures

22

The Impact of TABOR onLa Crosse County Spending

$-

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

Fiscal Year

Sp

en

din

g (

in m

illio

ns

of

do

llars

)

Total General Expenditures

TABOR Allow able Expenditures

23

The Impact of TABOR onCity of Milwaukee Spending

$-

$100.0

$200.0

$300.0

$400.0

$500.0

$600.0

$700.0

$800.0

$900.0

Fiscal Year

Sp

en

din

g (

in m

illio

ns

of

do

llars

)

Total General Expenditures

TABOR Allow able Expenditures

24

The Impact of TABOR onCity of Beaver Dam Spending

$-

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

$16.0

Fiscal Year

Sp

en

din

g (

in m

illio

ns

of

do

llars

)

Total General Expenditures

TABOR Allow able Expenditures

25

Will Spending Limits Deliver Significant Property Tax Relief?

NO, lowering property tax rates provides completely untargeted tax relief Non-residents share tax relief and substantial

amounts of tax relief go to those not facing high property tax burdens, i.e. taxes relative to their income

Not all households face high property tax burdens DOR study showed that those with modest income

and many elderly face above-average burdens

26

Average Residential Property Tax Burdens by Income -- Wisconsin,

2001

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Poorest20%

2nd 20% 3rd 20% 4th 20% Top 20%

Household Quintile

Effe

ctiv

e T

ax R

ate

Regressive Variant

Plausible Variant

27

Won’t Making Spending Decisions by Referendum Lead to Better

Decisions? Making careful decisions on complex budget

issues requires an investment of time that most voters don’t have Representative democracy has served the state well

for more than 150 years

Elections can be unduly influenced by special interests with lots of money for media advertising

With low election turnout the norm, referenda don’t guarantee a greater “voice to the people” unless all citizens are well informed and everyone votes

28

What is Wrong With Placing a Limit on the Size of

Government? State and local governments mainly

provide services, e.g. education, public safety, rather than goods

In the private sector, services are becoming an increasing share of personal consumption expenditures Between 1984 and 2003, the share of

services grew by 15% The share of spending on medical care grew

by 38%

29

What is Wrong With Placing a Limit on the Size of

Government? (cont.)

As services become more important in the economy (and the relative prices of goods drops), future generations may well want to devote a larger share of their income to government service provision

Thus, limiting the size of government now, could actually reduce economic well-being in the future

30

What is Wrong With Placing a Limit on the Size of

Government? (cont.)

TABOR would place today’s standards about the appropriate role of government into the constitution, thereby imposing these standards on future generations

31

Wisconsin’s Fiscal Problems are Complex, Beware of Simple Solutions

Wisconsin has fiscal problems: We need to reform our systems of school

finance and of Shared Revenue There are calls for providing meaningful

property tax relief

These are complex problems without simple solutions

32

Wisconsin’s Fiscal Problems are Complex, Beware of Simple Solutions

(cont.)

Constitutional limits, like TABOR, are simple, blunt instruments By design, they are inflexible and will

almost certainly have unintended consequences

They will probably make finding solutions to existing problems harder