Limiting Government Spending in Georgia

September 9th, 2005 by Leave a Comment

By E. Frank Stephenson

One of the most important factors in determining a state’s quality of life and economic environment is the size of its government and the ability, via structural restrictions or the exercise of self-restraint by elected officials, to limit the tax burden that the state government and its local subsidiaries impose on the citizenry. Georgia, unlike many states, has no structural impediments to governmental growth and thus must rely solely on its elected officials to limit government spending.[1] Yet special interests seeking government favors and politicians trying to charm voters are reasons to doubt that elected officials provide an effective buffer against expanding government. This study examines the recent behavior of state and local spending in Georgia, and reports evidence that Georgia’s elected officials have not provided a strong bulwark against increasing tax burdens. Accordingly, it proposes a tax and expenditure limitation (TEL) as a structural barrier to further encroachment.

I. An Overview of Government Spending in Georgia

Table 1 reports Tax Foundation data on Georgia’s state and local tax burden as a share of income over the 1970-2005 period.[2] Residents’ tax burden was 8.7 percent of their income in 1970, but gradually crept up to 10.2 percent by 1989. Georgia’s state and local tax burden remained over 10 percent throughout the 1990s until a modest retrenchment in government spending following the recession of 2001 reduced Georgians’ tax burden to 9.8 percent of their income. Even with the reduced spending after 2001, Georgia’s combined state and local tax burden increased 1.1 percentage points during the 1970-2005 period.

How does Georgia’s performance compare to that of other states? Table 1 also reports the rank of Georgia’s state and local tax burden relative to the other 49 states. In 1970, Georgia had the 41st-highest tax burden, making it one of the lowest-taxed states in the nation. Between 1970 and 1990, however, Georgia catapulted up to the 17th-highest tax burden. Georgia’s ranking improved a bit during the 1990-2005 period as robust economic growth reduced Georgians’ tax burden to the 31st-highest among the 50 states.

For another perspective on Georgia’s tax performance relative to other states, Table 2 shows each state’s change in state and local taxes over the 1970-2005 period.[3] Of the 50 states, Georgia’s 1.1 percentage point increase in its tax burden is the 13th-largest increase.[4] Hence, Georgia’s record in restraining government spending compares poorly to most other states; indeed, nearly half (21) of the states decreased their tax burdens.

           II. The Rationale for a TEL in Georgia

Georgia’s mediocre record in controlling the growth in government spending and maintaining a low tax burden on its citizens suggests that structural reform might be a useful constraint on politicians. As evidenced by the roughly $1 billion expansion of government spending enacted in the 2005 legislative session,[5] the democratic process (e.g., fear of reprisals from voters) is an inadequate restraint on politicians who seek to curry campaign contributions from special interests and to bring home goodies to garner votes.

Besides constraining the growth of government spending in Georgia, a TEL that is linked to Georgia’s budget stabilization (aka “rainy day”) fund should provide greater stability in government spending. By avoiding a rapid increase in government spending in years when a robust economy generates increasing tax revenue and by diverting some of the revenue to a rainy day fund, the state can use the fund to offset reduced tax revenues such as those of the 2001-2003 period.

III. Features Required for an Effective Tax and Expenditure Limit[6]

Twenty-seven states have some form of tax and expenditure limitation. Many of these requirements have been in place for two decades or more, giving an opportunity to evaluate which components are necessary for an effective TEL. Research has identified the following features as being necessary for a successful TEL:

  • The TEL must be enshrined in a state’s constitution; statutory limits can be changed at the whim of a legislature.
  • The TEL’s base must be defined to include most, if not all, categories of government expenditure. In Georgia, few, if any, forms of spending other than the lottery’s HOPE and Pre-K programs should be exempt.
  • A TEL should include both state and local government spending. One reason for including both state and local government spending is that limiting only state spending is an invitation for the state government to impose unfunded mandates on local governments. A second reason for including both state and local government spending is that Georgia is among the most decentralized states in the country. With the state government accounting for just over half (51.3 percent) of combined state-local spending, only five states have more decentralized government spending than Georgia.[7] Thus a TEL that limited only state spending would leave taxpayers exposed to large increases in spending at the local level.
  • The TEL should be limited to inflation plus population growth. There are two significant advantages of tying the TEL to inflation plus population growth rather than the rate of income growth (a popular alternative). One advantage is that a population plus inflation TEL will lead to smaller government spending in the long run because the TEL will not adjust upward with economic growth. (Even in the 1990s when Georgia’s state and local tax burden remained roughly stable, government spending grew about two percentage points faster per year than inflation plus population growth.[8]) Another advantage is that a population growth and inflation TEL provides a more stable path of government spending over time.  Population growth and inflation tend to grow at a relatively steady pace over time; by contrast, income growth is more variable over time and can experience sharp downturns during recessions.
  • A TEL must require either a supermajority vote or a referendum in order to exceed the limited amount of spending. Governments should have the ability in extenuating circumstances to exceed the spending limit; however, a simple majority vote provides no restraint above and beyond the current reliance on politicians’ self-restraint. The same override mechanism does not have to apply at both the state and local levels. For example, a TEL could require a referendum for local governments to exceed the spending limit but a supermajority (e.g., two-thirds) for the state government to exceed the spending limit.
  • A TEL must have explicit rules for handling tax revenue above the spending limit.    During robust economic times, tax revenue often grows faster than inflation plus population growth. Georgia should place such funds into its rainy day fund until that fund meets a pre-set target for adequate funding (for example, 10 percent[9] of the state or local government’s budget). Once the rainy day fund has been fully funded the excess revenue should automatically be refunded to taxpayers. At the state level, refunds might be set as a proportion of state income tax liability. At the local level, refunds might set as a proportion of property tax revenue. (In principle there is nothing inappropriate about basing refunds on sales taxes, but there is no practical manner to determine how much sales tax each person pays.)

IV. Conclusion

Georgia, unlike nearly half of the other states, has experienced an increasing state-local tax burden over the past three decades. This suggests that relying on the self-restraint of politicians and special interests is not working well for Georgia’s citizens who prefer small government and individual liberty. A tax and expenditure limitation, or TEL, is a structural reform that has worked well in places such as Colorado and Michigan[10] and might provide additional spending restraint on Georgia’s state and local governments.

 

Table 1

Georgia’s State and Local Tax Burden 1970-2005

Year

State-Local

Tax Burden

State Rank

(1 is highest)

 

Year

State-Local

Tax Burden

State Rank

(1 is highest)

1970

8.7%

41

 

1988

9.8%

28

1971

8.8%

39

 

1989

10.2%

19

1972

9.1%

36

 

1990

10.2%

17

1973

9.0%

34

 

1991

10.2%

24

1974

9.3%

33

 

1992

10.2%

24

1975

9.3%

31

 

1993

10.2%

22

1976

9.3%

32

 

1994

10.2%

25

1977

9.3%

33

 

1995

10.2%

26

1978

9.1%

32

 

1996

10.1%

27

1979

9.0%

28

 

1997

10.0%

29

1980

9.2%

26

 

1998

10.2%

28

1981

9.3%

21

 

1999

10.2%

26

1982

9.6%

24

 

2000

10.4%

23

1983

9.5%

25

 

2001

10.4%

27

1984

9.3%

31

 

2002

9.9%

30

1985

9.7%

21

 

2003

9.9%

29

1986

9.7%

24

 

2004

9.9%

30

1987

9.7%

31

 

2005

9.8%

31

 

Table 2

The Change in State and Local Tax Burdens 1970-2005

 

 

 

 

 

 

 

 

State-Local Tax Burden

     

State-Local Tax Burden

 
State

Change 1970-2005

Rank

  State

Change 1970-2005

Rank

OH

2.9

1

  ID

0.3

26

AR

2.2

2

  MD

0.3

27

ME

2.2

3

  MN

0.2

28

LA

2

4

  MI

0.1

29

RI

1.9

5

  OR

-0.1

30

CT

1.6

6

  IL

-0.3

31

NJ

1.5

7

  MS

-0.3

32

KY

1.4

8

  NM

-0.3

33

OK

1.4

9

  NY

-0.3

34

TX

1.4

10

  TN

-0.4

35

NC

1.3

11

  WI

-0.4

36

SC

1.2

12

  CO

-0.5

37

GA

1.1

13

  MA

-0.5

38

PA

1

14

  WA

-0.5

39

WV

0.9

15

  AZ

-0.6

40

HI

0.8

16

  CA

-0.6

41

IN

0.8

17

  IA

-0.7

42

VA

0.8

18

  NV

-0.7

43

MO

0.7

19

  MT

-0.9

44

NE

0.6

20

  WY

-1

45

AL

0.5

21

  NH

-1.2

46

FL

0.4

22

  VT

-1.2

47

KS

0.4

23

  ND

-2

48

UT

0.4

24

  SD

-3.3

49

DE

0.3

25

  AK

-4.9

50

 

 

 

 

[1] See Barry Poulson, “Grading the States’ Tax and Expenditure Limits,” Americans for Prosperity Foundation, June 2005.

[2] The Tax Foundation, Tax Data, Georgia’s State and Local Tax Burden, 1970-2005, at www.taxfoundation.org/taxdata/show/448.html

[3] Author’s calculations, based on Tax Foundation’s Tax Data, State and Local Tax Burdens by State, 1970-2005, at www.taxfoundation.org/taxdata/show/335.html.

[4] Recall that tax burden is measured as taxes as a share of state income. Hence, Georgia’s strong population growth is not the cause of Georgia’s increased tax burden between 1970 and 2005. Indeed, states such as Maine, Rhode Island, and Louisiana have had both larger tax burden increases and slower population growth than Georgia.

[5] James Salzer, “$17.4 billion budget OK’d, after deal,” Atlanta Journal-Constitution, March 30, 2005, p. B4.

[6] Much of the discussion in this section is based on Russell S. Sobel et al., “Should Ohio Limit Government Spending and Taxes,” The Buckeye Institute and the Independence Institute, December 2004.

[7] Author’s calculations from Tax Foundation and Census Bureau data.

[8] From 1991 to 2001, Georgia’s population grew 2.4 percent per year (source: Census Bureau) and inflation ran 2.7 percent per year (source:  author’s calculations based on Economic Report of the President, Table B-60), meaning that a TEL would have permitted 5.1 percent annual growth in government spending. By contrast, Georgia’s state and local spending grew at a rate of 7.2 percent per year over the decade (author’s calculations from Census Bureau data). Put in dollar terms, Georgia’s spending grew from $26.2 billion in 1991 to $52.3 billion in 2001. Had a population growth plus inflation TEL been in effect over this period, Georgia’s combined state-local spending in 2001 would have been roughly $43 billion, or $9.3 billion lower than actual spending.

[9] Russell S. Sobel et al. (“Should Ohio Limit Government Spending and Taxes,” The Buckeye Institute and the Independence Institute, December 2004, p. 14) report that “Wall Street and bond rating agencies often recommend something in the range of 6 to 7 percent of the state budget … [but] there are no hard and fast rules.”

[10] See Sobel et al., pp. 18-21.

 


E. Frank Stephenson is associate professor of economics and Chairman of the Department of Economics at Berry College in Mount Berry, Georgia. The Georgia Public Policy Foundation is an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

© Georgia Public Policy Foundation (September 9, 2005). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.

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