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A Tale of Two TEL’s: How State Legislators Evade Spending Limits

August 31, 2012 J

By Casey Given

In theory, almost all 50 states have a legal limit on how much fast their government can grow. These ceilings, known as tax and expenditure limits (TEL), typically requires legislatures to submit a balanced budget and sometimes even stipulates a maximum amount they can spend in a given year.  But, in practice, most states have fallen by the wayside off their TEL’s road to fiscal responsibility, ringing up billions of dollars in deficits and debts at taxpayers’ expense. As of 2010, the states spent $92.8 billion over their budgets and owed an astronomical $1.1 trillion in debt.

This red ink seems puzzling considering it coincides with state’s TEL ceilings. How, for example, could Massachusetts have a deficit of $1.3 billion when one of its statutes requires that “the governor shall approve a general appropriation bill which shall constitute a balanced budget for the commonwealth?” Or, how could Alabama owe $8.8 billion in debt when its constitution says in no uncertain terms that “no new debt shall be created against, or incurred by the state, or its authority?” The truth is that while states claim to have such strong limits in place reigning in uncontrollable government growth, they fold when it comes to making the tough political choices to follow them by exploiting loopholes and passing laws that nullify their TEL’s effect.

Take Texas for example. The Lone Star State’s constitution prevents “the rate of growth of appropriations from state tax revenue” from exceeding “the estimated growth of the state’s economy.” The catch is that state tax revenue only accounts for approximately one-third of Texas’ total revenue since a large source of their budget comes from federal loans and grants for programs such as Medicare. Furthermore, Texas’ TEL allows legislators to surpass its ceiling if they declare “that an emergency exists” by a simple majority vote. One might think that something like a natural disaster or attack would constitute such a crisis. However, the public-minded politicians in Austin have interpreted “emergency” over the years to mean any time they can’t balance the budget, thereby using the expenditure limit against itself to justify deficits. Thanks to these loopholes, everything truly is bigger in Texas, including its $42 billion debt!

Secondly, many TELs are undermined by subsequent spending mandates. Colorado, for example, enjoyed one of the most effective expenditure limits throughout the 1990’s. The Centennial State’s Taxpayer Bill of Rights (TABOR) allowed government expenditures to grow at the fiscally responsible rate of inflation plus population growth each year to provide for its vital functions. Best of all, Colorado refunded taxpayers more than $3.2 billion in rebates under TABOR when revenues surpassed the ceiling, a wildly popular provision. In fact, Colorado voters rejected every ballot initiative proposing to surpass TABOR’s limit from 1993 to 1999.

Unfortunately, as Michael J. New and Stephen Slivinski of the Cato Institute explain, Colorado voters also passed a mandatory spending initiative in 2000 called Amendment 23 that required education expenditures to increase by the rate of inflation plus one percent each year. Although well-intentioned, this additional one percent undermined the whole purpose of TABOR and resulted in a major spending constraint. Considering that the limit allowed expenditures to increase by inflation plus population already and Amendment 23 required education spending to surpass this increase by 1% every year, the initiative effectively required the state to cut other expenditures by 1% annually to free up the extra funds for schools. This constraint plus a recession squeezed Colorado’s budget, leading voters to suspend TABOR from 2005 through 2010

A similar drama also unfolded in California during the late 1980s, when the Golden State’s Gann Limit on spending was also undermined by a mandatory education expenditure initiative called Proposition 98 that effectively required school budgets to always increase, even if revenues decreased.

Thus, while TEL’s have made good talking points for states to claim they have a fiscally responsible government, political actors often weasel around their requirements. Through finding loopholes in the law or passing mandating spending requirements, legislators run up deficits or squeeze their budgets and often blame the TEL afterwards for being the root of the problem

In reality, TEL’s that haven’t been corrupted by political influence have proven to be effective in decelerating the speed of state spending. In fact, Matthew Mitchell of the Mercatus Center found that states with TEL’s based on the population plus inflation formula spend three percent less than average state and local spending. If citizens craft such sound TEL’s and give them a chance, they could meaningfully control the growth of their government while allowing expenditures to increase at a fiscally responsible rate. But, if we keep folding to the corrupting influence of labor unions and debt-drunk politicians, balanced budgets will remain an unattainable ideal in our states’ constitutions.

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