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

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Consequences of ConstitutionalRevenue and
Spending LimitsLa Follette School Conference
on Taxing and Spending Limits in
WisconsinJanuary 19, 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 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.

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But, Government Spending Hasnt Grown Any Faster
than the Economy Over the Past Decade
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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

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

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The Impact of TABOR (Assembly Version) on School
District Spending
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The Impact of TABOR (Assembly) on Spending in the
Manitowoc School Distr.
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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 districts past frugality
• Infusion of Southeast Asian immigrants will raise
  the costs of education, adding to fiscal pressure

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The Impact of TABOR on Spending in the Madison
Metro School District
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TABOR (Assembly) Would Have Been More Restrictive
than the Revenue Caps
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The Impact of TABOR onOutagamie County Spending
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The Impact of TABOR onLa Crosse County Spending
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The Impact of TABOR onCity of Milwaukee Spending
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The Impact of TABOR onCity of Beaver Dam Spending
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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

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Average Residential Property Tax Burdens by
Income -- Wisconsin, 2001
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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
  unless all citizens are well informed and
  everyone votes

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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

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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

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What is Wrong With Placing a Limit on the Size of
Government?

(cont.)

• TABOR would place todays standards about the
  appropriate role of government into the
  constitution, thereby imposing these standards on
  future generations

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Wisconsins 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

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Wisconsins 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