February 25, 2003

Tax and Spending Limits Also Limit Deficits

Some states are facing less dire fiscal crises then others. Michael New explains why...

During the economic expansion of the late 1990s, many states behaved as if their coffers would remain perpetually flush with revenue. However, that spending surge, coupled with the economic slowdown, has resulted in budgetary shortfalls across the nation. It should be noted that the fiscal situation is better in states that were able to limit budgetary growth. However, the question remains, why were some states more disciplined than others? The lessons have little to do with partisanship and more to do with the amount of fiscal discipline that was imposed on state legislators.

Indeed, one fiscal-discipline measure that enjoyed some success in limiting the growth of government during the 1990s is that of the tax and expenditure limitation, or TEL. TELs restrain government growth by limiting the amount that expenditures or revenues can increase in any given fiscal year. Many studies argue that TELs are fairly ineffective. However, during the 1990s, two states, Washington and Colorado, enacted TELs that set especially low limits for budgetary growth. The experiences of these two states are instructive. First, in both cases, state spending was restrained. According to data from the National Association of State Budget Officers, Washington ranked 46th in per capita state-expenditure growth during the 1990s. Similarly, between 1993 and 2000, Colorado ranked 41st in per capita state and local expenditure growth, according to the U.S. Census Bureau. Second, residents in both states enjoyed a considerable amount of tax relief. Colorado's TEL was unique because it mandated immediate refunds of surplus revenues. As a result, between 1997 and 2002, Colorado residents received tax rebates every year, totaling over $3.2 billion. In Washington, the situation was similar. Since spending was kept in check, surpluses began to materialize. These surpluses were used to first lower and then abolish the car tax, saving residents more than $1.3 billion. Not surprisingly, Colorado and Washington ranked first and second in terms of aggregate tax reductions during the late 1990s.

These fiscal limitations have not been able to prevent deficits altogether. In fact, Washington's current deficit is due partly to the fact that the state legislature suspended the TEL in 2000 and spent in excess of the limit. Still, many other states, such as California, New Jersey, and Massachusetts provided far less in the way of tax relief and are currently experiencing much larger deficits. This is largely because these states were unable to keep spending in check during the 1990s.