During the 1970s, there was widespread concern about how much states were spending. This brought about debates across the nation of how best to effectively limit state spending.
In 1976, New Jersey took the first step to accomplish this through statute by enacting a tax and expenditure limit (TEL) that limited spending –growth to no more than state income growth. After forty years, twenty-seven states now have some sort of TEL.
The results from these experiments show that any TEL tends to be better at achieving a state’s intended objective of limiting spending than not having one, but some TELs perform better than others.
A TEL is simply an institutionalized restriction on the growth of revenue and/or spending. The goal of a TEL is to restrain the growth of state spending to a level that can fully fund government programs without over-burdening taxpayers by paying too much in taxes.
Despite more than half of all states having a TEL, the Mercatus Center finds that total spending by all 50 states increased at a rapid rate from 2000 to 2009. Specifically, states spent $1.90 for every dollar increase in the private sector during this period. This almost 2-to-1 state government growth compared with the private sector provides a great deal of concern about the crowding out of taxpayers’ ability to save, budget appropriately, and start businesses.
Effective limitations on the growth of government are needed more now than ever.
According to the Cato Institute, citizen initiatives have proven to be the most effective way to restrain the growth of government. Democratizing the approval and structure of TELs has led to more surpluses refunded to taxpayers and to stronger restraints on the expenditure limit.
Different metrics can be used to guide the TEL. Research on this issue finds that population growth plus inflation has been a good approach in the past of allowing taxpayers to keep more of their hard-earned dollars. Only five states-Alaska, Nevada, Ohio, Utah, and Washington-have a TEL based on population growth and inflation.
The stronger the disconnect between the spending limit and taxpayers, which occurs when legislators pass a TEL in statute but do not let citizens vote on the measure, the more likely the state is to use loopholes and accounting gimmicks to spend around the limitations.
For example, Texas’ citizen-approved constitutional TEL caps spending of general revenue funds not designated by the state’s constitution based on the growth of the state’s economy-which personal income is used as a proxy. A common critique of Texas’ TEL is that it does not account for total state spending. This gives the legislature wide discretion to shift spending around in the budget to avoid a hard cap, contributing to higher spending growth.
The success of TELs, particularly an approach based on population growth plus inflation, provides evidence that states with clear and achievable government spending restraints hold the line better on spending growth than states without. Texas’ legislators should consider strengthening the state’s TEL by limiting all spending to the growth rate of metrics that work to reduce the growth of government, such as population growth plus inflation. This will help provide the best path for liberty and prosperity to reach all Texans.