This week the American Enterprise Institute released a report by economist Benjamin Zycher analyzing the impact of state-level Tax and Expenditure Limitations (TELs) on government growth. Analyzing fiscal data from a range of states, Zycher concludes that TELs are largely ineffective. He argues that the presence of a TEL does not change the underlying public demand for government services. Similarly TELs do not stop rent seeking, interest-group demands, or other activities that lead to expanding government.
Zycher’s data collection is thorough and his analysis is methodologically rigorous. His study is consistent with a body of academic research which has found that revenue and spending limits are an ineffective tool for limiting the growth of government. The reasons he present explain part of this. However, Zycher spends little time considering the incentives of those drafting TELs. Many TELs are largely symbolic measures enacted by state legislatures. These TELs allow legislators to publicly take a position in favor of smaller government. However, they contain loopholes that give legislators the freedom to avoid cutting popular programs.
Conversely, my 2010 State Politics and Policy Quarterly article shows that TELs that are drafted by taxpayer groups — and passed through the initiative process — have features conducive to limiting government growth. Some of these TELs, such as Washington State’s I-601 and California’s Gann Limit, both enjoyed some short-term success at limiting the growth of government in their respective states. However, the best example of an effective TEL was Colorado’s Taxpayer’s Bill of Rights (TABOR), which was adopted in 1992.
TABOR had three characteristics that made it especially effective. It was constitutional, it set a low limit for government growth, and it mandated taxpayer rebates of surplus revenues. Between 1997 and 2002, Colorado taxpayers received $3.2 billion in tax rebates from the state government. Colorado led the nation in both tax relief and economic growth during this time. Furthermore, because of the popularity and visibility of the tax rebates, most statewide ballot measures to spend over and above the TABOR limit were unsuccessful.
Unfortunately, in the early 2000s, Colorado’s economy slowed down. This was partly due to the national economic slowdown after the September 11 attacks and also due to the fact that Colorado suffered a severe drought. Overall, Colorado’s revenue declined by 15 percent between 2001 and 2003. Making matters worse, in 2000, TABOR opponents strategically enacted Amendment 23, which mandated annual increases in K–12 education spending. These spending increases coupled with the decline in state revenues strained the Colorado budget. Many politicians and media outlets opportunistically blamed this on TABOR. The end result was the passage of Referendum C in 2005, which suspended TABOR’s revenue limit for five years.
Since the passage of Referendum C in 2005, TABOR’s reputation has been tarnished and subsequent efforts to enact TABOR-style TELs elsewhere have failed. As such, fiscal conservatives turned their attention elsewhere. Zycher’s study is thankfully giving TELs some much-needed salience. However, he should have given more attention to success stories like Colorado’s TABOR. Indeed, TABOR’s history provides good evidence that a properly designed TEL can be a powerful tool for fiscal conservatives. Indeed, TELs can result in smaller government, tax relief, and economic growth.
— Michael J. New is an assistant professor of political science at the University of Michigan — Dearborn, a fellow at the Witherspoon Institute, and an adjunct scholar at the Cato Institute. Follow him on Twitter @Michael_J_New