State and Local Tax Policy: What are tax and expenditure limits?
Tax and expenditure limits (TELs) restrict the level or growth of government revenues or spending to a fixed numerical target or to increases in an index such as population, inflation, personal income, or some combination of these measures. As of 2008, thirty states had at least one TEL. Twenty-three states imposed state spending limits, four had state revenues limits, and three had both. Another way states limit growth in revenues is through requiring legislative supermajority or voter approval requirements for passage of new taxes. Sixteen states had such requirements in place in 2008 (Waisanen, 2008). In addition, forty-six states limited property taxes or other revenues or expenditures of local governments (Mullins and Wallin, 2004). Several local governments also operated under their own locally imposed TELs (Brooks et al., 2007).
- Most TELs emerged during the tax revolt of the late 1970s or the economic recession of the early 1990s. Although many of the best known local property tax limits such as California’s Proposition 13 and Massachusetts’s Proposition 2 1/2 were adopted through citizen initiatives, most state TELs come from state legislatures. As of 2008, legislatures had enacted 14 TELs and referred ten more to popular vote. Eight TELs were passed as voter initiatives and two emerged from constitutional conventions.
- More stringent TELs require that surplus revenues go back to taxpayers as rebates or into rainy day funds. Some TELs prohibit states from evading the limit through unfunded mandates or transfers of program responsibility to local governments.
- Statutory TELs generally bind taxes and spending less than constitutional limits. In 2008, 19 state TELs were constitutional and 17 were statutory.
- Colorado enacted a Taxpayer Bill of Rights (TABOR) in 1992 that is arguably the nation’s most restrictive TEL. TABOR applies to all taxing districts in Colorado and requires that voters approve all tax rate increases, new taxes, and increases in property tax assessments. The law also explicitly prohibits particular types of taxes. Finally, and arguably most importantly, TABOR limits general revenues to the previous year’s revenues adjusted for population growth and inflation. All excess revenues must go back to Coloradans through tax reductions or cash rebates. Only voters can override these provisions or any other spending or revenue limits. Colorado voters agreed in November 2005 to suspend their revenue cap for five years, resetting the level of the limit based on current limits. (McGuire and Rueben, 2006.)
- Related to TELs are legislative supermajority and voter approval requirements for new taxes. Sixteen states had such requirements in 2008. Thresholds for a legislative supermajority ranged from three-fifths to three-fourths. Supermajority or voter-approval requirements may pertain to all taxes or only to specific revenue sources such as corporate or sales taxes.
- TELs can also interact with other constraints. Knight (2000) found that states with both TELs and supermajority requirements to raise taxes had lower expenditures than states with just one or the other constraint. Poterba and Rueben (1999) found that TELs affect the costs of state borrowing in two ways: spending limits lower the costs while revenue limits increase them.
- Evidence on whether TELs limit state and local spending is mixed (Gordon, 2008). Rueben (1996) found that specific details of the laws matter. She also found that TELs requiring a legislative supermajority or popular vote to modify spending led to a 2 percent reduction in state general fund expenditures, but that those savings were offset in part by higher local spending.
- Recent volatility in state and local government finances has renewed interest in TELs with many states proposing limits modeled on Colorado’s TABOR or other limits on property taxes or public spending. As of mid-2009, no other states had enacted measures like TABOR.