Buffer Taxpayers From Government Spendthrifts

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 to limit the tax burden that the state government and its local subsidiaries impose on the citizenry.

Twenty-seven states have some form of tax and expenditure limitation; Georgia has no structural impediments to governmental growth and must rely solely on its elected officials to limit government spending. Yet special interests seeking government favors and politicians trying to charm voters lead many people to doubt that elected officials provide an effective buffer against expanding government.

Georgia residents’ tax burden was 8.7 percent of their income in 1970, but gradually crept up to 10.2 percent by 1989. The 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, however, the burden increased 1.1 percentage points from 1970 to 2005, the 13th-largest increase in the nation. By comparison, nearly half (21) of the states decreased their tax burdens during that period.

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.

This state’s mediocre record in controlling the growth in government spending and maintaining a low tax burden on its citizens suggests that structural reform, in the form of a tax-and-expenditure limit (TEL), might be a useful constraint on politicians. As evidenced by the roughly $1 billion expansion of government spending enacted in the 2005 legislative session, the democratic process (e.g., fear of reprisals from voters) is an inadequate restraint on politicians.

To be successful, research shows, a TEL needs to be enshrined in a state’s constitution or face the risk of statutory limits that can be changed at the whim of a legislature. Exceeding the spending limit should require either a supermajority vote or a referendum. The override mechanism need not be the same at the state and local level: perhaps a referendum at the local level and a supermajority at the state level. While governments should have the ability in extenuating circumstances to exceed the spending limit, a simple majority vote provides no restraint above and beyond the current reliance on politicians’ self-restraint.

The TEL must be defined to include most, if not all, categories of government expenditure, and should include both state and local government spending.  Just five states have more decentralized government spending than Georgia, where state government accounts for 51.3 percent of combined state-local spending. Thus a TEL focusing only on state spending leaves taxpayers exposed to large increases in spending at the local level.  Moreover, limiting just state spending is an invitation for the state government to impose unfunded mandates on local governments.

Additionally, the TEL should be limited to inflation plus population growth. That produces smaller government spending in the long run because the TEL will not adjust upward with economic growth. A TEL based on inflation and population growth also provides a more stable path of government spending over time because population growth and inflation tend to grow at a relatively steady pace.  By contrast, income growth is more variable over time and can experience sharp downturns during recessions.

Finally, a TEL needs explicit rules for handling excess tax revenue, because tax revenue often grows faster than inflation plus population growth during robust economic times. Georgia should place such funds into its rainy day fund up to a pre-set target for adequate funding, then the excess revenue should 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 be a proportion of property tax revenue.

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 is able to offset reduced tax revenues such as those of the 2001-2003 period.

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. Structural reform that has worked well in places such as Colorado, which pioneered the TEL movement with its Taxpayer Bill of Rights (TABOR) and Michigan (Headlee Amendment) might provide additional spending restraint on Georgia’s state and local governments.

Read E. Frank Stephenson’s Issue Analysis, “Limiting Government Spending in Georgia.”

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.