When examining the growth of government, it’s important to consider the restraints on government spending and whether those limits are effective. This is important because the larger role the government plays in the economy, the less economic freedom and individual liberty there is from higher taxes and excessive regulation. In fact, TPPF’s recent report The Conservative Texas Budget provides evidence that low-tax states, specifically those without an income tax, perform better economically than high-tax states (see Table 1 below from the report).
To allow for an economic environment that maximizes these key characteristics of a free society, 30 states have some form of a tax and expenditures limit (TEL). Let’s explore which metric the Texas Legislature should use as its TEL to effectively limit the growth of state spending—and thus the burden on Texans.
As noted in a TPPF report, 84 percent of Texas voters approved the Texas Tax Relief Act in 1978. This constitutional amendment restrained the growth rate of biennial appropriations in general revenue not dedicated by the state’s constitution to the growth rate of the state’s economy. According to Government Code 316.002, the proxy for the state’s economy is personal income. This TEL determines the amount the Legislature can appropriate, and if this amount equals expenditures over the two-year period, then it should limit spending as well.
Consider the three common metrics used to limit the growth of government:
- Personal Income Growth: This metric is used in Texas and happens to be the most popular among states. From five estimates presented to them, the Legislative Budget Board (LBB) decides which of these forecasts to adopt as the official spending limit for the next biennium around November before the legislature meets the following January. Table 3 from an LBB’s report shows the most recent forecasts.
This limit is only on a portion of the state’s budget of non-dedicated general revenue, which is roughly 50 percent of the entire budget. The limit adopted for the current 2014-15 budget was 10.71 percent, and could be around the same rate for the 2016-17 biennium.
Though this metric is commonly used, it is counterintuitive for state spending to grow at the rate of personal income. If personal income is rising, then it would seem appropriate for state spending to fall as more Texans are able to afford their own health care and education while demanding less welfare.
- Gross State Product Growth: This metric measures the growth in the state’s total economic output. While it is commonly used, it has some of the same problems as those associated with personal income. If the economy is growing at a rapid rate, there is little reason for the government to grow at the same pace. It is also difficult to forecast over a two-year horizon given a dynamic economy.
- Population Growth Plus Inflation: This metric accounts for the rising cost of providing basic public necessities for a changing population. Over fiscal years 2013 and 2014, Texas’ population growth and inflation rates are 3.2 percent and 3 percent, respectively. If Texas’ TEL were based on population growth plus inflation, the spending limit would be 6.2 percent, which is what was recommended in The Conservative Texas Budget.
Let’s compare these three metrics with the adopted spending limits in each period based since the 1994-95 biennium (see Figure 1).
Actual personal income has been wildly off from the adopted spending limit, showing how difficult it is to make this forecast. This provides reason to base a spending limit on actual past data instead of forecasts.
Population growth plus inflation was lower than the adopted spending limit in every biennium. Clearly, this metric would have led to slower growth in state spending and less burden on Texans.
Further, population growth plus inflation was lower than the other two metrics in every biennium except for 2002-03 and 2008-09 during economic downturns in Texas. Unfortunately, the day might come when inflation is high, similar to the 1970s, which could make this measure not the best metric for the TEL.
To slow the growth of state spending and therefore the burden of the state on Texans, the Texas Legislature should reform the TEL to be the lesser of the growth in personal income, gross state product, or population growth plus inflation over the last two fiscal years on total expenditures. This would keep the size and scope of government limited, allowing Texans the enjoyment of fulfilling their hopes and dreams with their own resources.