Consequences of Constitutional Revenue and Spending Limits La Follette School Conference on Taxing...
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Transcript of Consequences of Constitutional Revenue and Spending Limits La Follette School Conference on Taxing...
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
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