Hype or Hypothermia The Consequences of Freezing Taxes Presentation sponsored by Grassroots North Sh

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Hype or Hypothermia?The Consequences of Freezing
TaxesPresentation sponsored by Grassroots North
Shoreand Plymouth United Church of ChristApril
10, 2005

• Andrew Reschovsky
• Robert M. La Follette School of Public Affairs
• University of Wisconsin-Madison
• reschovsky_at_lafollette.wisc.edu

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What is the Taxpayer Bill of Rights?

• A constitutional amendment which would
• Limit increases in state, school, county, and
  municipal spending using a set of specified rules
  (or formulas).
• Require referenda for exceeding spending limits,
  for any tax changes that cause net revenue gains,
  and for most borrowing decisions.

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What is the Property Tax Levy Freeze?(Governors
Proposal)

• For municipalities and counties
• Limit growth of levy to inflation (CPI) plus 60
  of change in tax base due to new regional
  construction
• In place for 2 years (governor) or 3 years
  (legislature)
• Override possible with referendum
• For schools
• Retain existing revenue caps
• Provide more state aid

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Five Questions about TABOR

• Why the push for TABOR now?
• Are the claims of TABOR supporters justified?
• What are the likely impacts of TABOR on the
  provision of public services in Wisconsin?
• Is referenda-based fiscal decision making
  preferable to fiscal decision making by elected
  representatives?
• Can we deal with Wisconsins fiscal problems
  without amending the constitution?

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Supporters argue that TABOR is needed because

• We must slow down the out of control growth of
  government spending
• We have more government than we can afford
• Taxes are too high
• In particular, property taxes are too high and
  growing too fast

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A Look at the Facts the Growth of Government
Spending

• State and local government spending over the past
  decade has grown at about the rate of growth of
  personal income in Wisconsin
• Spending on K-12 education has grown more slowly
  than the growth of the Wisconsin economy
• Not surprisingly, relative to personal income,
  state and local taxes are lower today than they
  have been at any time in the past 20 years

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State and Local Government Direct General
Expenditures as a Percent of Personal Income
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State Local Tax Burdens are now at a
Historically Low Level
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A Look at the Facts Do We Have More Government
than We Can Afford?

• Wisconsin is not a particularly high spending
  state
• In FY 2002, WI ranked 19th in state and local
  spending relative to personal income
• Wisconsin solved its fiscal crisis with spending
  cuts, and our personal income growth has been
  above the national average, so our spending
  ranking has almost certainly fallen

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A Look at the Facts Are Taxes in Wisconsin Too
High?

• WI ranked 6th in taxes in 2002, but
• Much more appropriate measure of burden includes
  fees and charges
• In 2002, WI ranks 15th in state and local own
  source general revenue
• Income and property taxes are deductible, but
  fees are not
• The majority of the states have revenue burdens
  within a penny or two of ours

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A Look at the Facts Taxes and Economic
Development

• There is ample evidence from many studies that
  taxes are not a very important factor in business
  locational decisions
• A well-trained labor force and high quality
  public services (including infrastructure) are
  very important for businesses
• Business taxes are relatively low in WI
• WI ranks 36th in business taxes as a share of
  profits
• There are no examples of low tax--high income
  states

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The Relationship Between State Per Capita Revenue
and Per Capita Income
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A Look at the Facts Property Tax Burdens in
Wisconsin

• Property taxes are relatively high, and they
  create hardships for some families, but
• For most people, property tax levies have grown
  less rapidly than income over the past decade
• Property taxes on the median value house have
  grown more slowly than inflation

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Property Tax Levies Have Declined as a Percent of
Income Over the Past Decade
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But Residential Share Has Grown

• 1971 1991 2004
• Residential 51 60 69
• Commercial 19 24 21
• Manufacturing 18 6 4
• Agricultural 10 8 3
• Economic changes rather than tax policy changes
  explain most of shifting shares

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How Will TABOR 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

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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?

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The Impact of TABOR (Assembly) onState
Government Spending
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State Spending Relative to IncomeWith and
Without TABOR (Assembly)
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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

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State Appropriations for University of Wisconsin
System per 1,000 of Personal Income
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State Appropriations for University of Wisconsin
System as a Share of Total State Spending
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The Impact of TABOR (Assembly Version) on School
District Spending
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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)

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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

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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-im
  posed limit
• But, why?

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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

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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

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Why Might Public Services Decline Even Though
TABOR Allows Spending to Grow?

(cont.)

• As long as health care spending goes up at a
  faster rate 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

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Likely Impacts of Property TaxLevy Freeze
Proposals

• Governor proposes no increase in shared revenue
  unless municipalities and counties adopt even
  tighter limits
• Frugal and efficient governments will face
  largest cuts in public services
• Impact of TABOR will be even more severe if it
  follows a 2 or 3 year freeze
• Without substantial increases in state aid to
  schools, freeze will lead to smaller increases in
  spending than allowable under existing revenue
  caps

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Impact of Governors Freeze Proposal on North
Shore Communities
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Changes in State Aid to Counties, Municipalities,
and Schools

• Counties Municip. Schools
• 2001 -0.2 5.7
• 2002 -1.1 3.0
• 2003 1.4 3.6
• 2004 -8.6 0.6
• 2005 0.0 1.1

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Wont Making Spending Decisions by Referendum
Lead to Better Decisions?

• Making careful decisions on complex budget issues
  requires an investment of time that most voters
  dont 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
  dont guarantee a greater voice to the people
• Should decisions about K-12 education be left to
  local communities?

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Alternatives to TABORPolicies to Address the
States Fiscal Problems

• Enact targeted property tax relief by expanding
  income eligibility to the homestead exemption
• Adopt an expanded property tax deferral program
  that is available to everyone
• Consider adopting alternative local government
  revenue sources
• WI puts above-average reliance on property
  taxation
• The State Legislature should adopt strict pay as
  you go rules

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Alternatives to TABORPolicies to Address the
States Fiscal Problems

(cont.)

• Place money into a rainy day fund
• Reform the school funding system
• State equalization formulas should reflect
  differences in the costs of meeting state (and
  NCLB) student performance standards
• Reform the funding of special education
• Above some spending level, local taxpayers should
  bear the full cost of additional spending

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And Finally

• If citizens believe that government in Wisconsin
  is too large (it provides too many services or
  too high quality services), then they can elect
  representatives who want to reduce the size of
  government
• Constitutional limits, like TABOR, are simple,
  blunt instruments
• By design, they are inflexible and they impose
  todays standards on future generations