Senate Finance Committee Interim Hearing
Testimony by William Lutz, on behalf of Americans for Prosperity – TX
August 29, 2012
Senate Interim Charge: Review the state’s current spending limits and determine if statutory changes are needed to continue restraint of spending growth below the rate of inflation plus population growth.
Mr. Chairman and Committee Members, thank you for the opportunity to testify on behalf of Americans for Prosperity about Texas’ tax expenditure limit. My name is William Lutz and I am a volunteer policy advisor to Americans for Prosperity-Texas. Thank you for the opportunity to testify.
One of the main reasons Texas has fared better than most other states (especially California) during this recession is a result of some forward-thinking clauses your predecessors left in the Texas Constitution. Unlike many other states, Texas can’t spend money it doesn’t have and incurring state debt is difficult. And we have an independently-elected comptroller to enforce our pay-as-you-go limit, which makes our revenue estimates historically conservative. While many of these provisions could be improved, the core idea behind them is sound and they have proven their value in recent years.
As many of you already know, Texas is one of over 30 states to have a legal limit on how much revenue our government can raise and spend. Texas voters overwhelmingly passed the Tax Relief and Reform Act ballot initiative in 1978, resulting in the enactment of Article 8 Section 22 of our state constitution, which states that the rate of spending from tax revenues shall not exceed the growth in Texas’ economy every two years. In theory, this should properly restrain government. But, theory is not practice.
In practice, Texas has detoured from the road to fiscal responsibility that the Tax Relief and Reform Act promised. From 2000 to 2010, Texas’ economy grew by 28%[i] while our state’s expenditures have increased by 52%[ii]. In other words, state spending has grown nearly twice as much as our economy has. While Texas voters certainly had good intentions in trying to rein in our state government’s growth in 1978, clearly the Tax Relief and Reform Act has not worked as well as it was intended.
Naturally, the question arises of why Texas’s state spending has exceeded the growth in our economy. After all, Article 8 Section 22 says in no uncertain terms that appropriations from non-constitutionally-dedicated revenues cannot surpass economic growth. How did spending increase this much?
The answer is found in the loopholes of Article 8, Section 22. Sometimes, the Legislature will shift ongoing spending into constitutionally-dedicated funds to avoid the spending limits. A good example of this is the shady practice of pressuring the State Board of Education to increase the payout of the Permanent School Fund into the Available School Fund to unsafe levels. When the PSF distribution is increased, a higher portion of school spending is paid by a dedicated fund, and thus exempt from the spending limit. But the cost of that action is draining the fund so it won’t be there for future generations.
A more serious problem is the Legislative practice of raiding fees. Gov. Rick Perry has rightly called for ending this abuse in his budget compact, which AFP enthusiastically supports. Often, fees are collected but left un-appropriated, leaving dedicated revenue in the pot available for certification (or spending) under the pay-as-you-go limited in Article III,Section 49-a of the Texas Constitution.
When a fee is collected but not spent on its intended purpose, we believe that’s a tax and should count toward the constitutional spending limit.
Another problem is the use of Personal Income as the measure of economic growth under the Article VIII, Section 22 limit. We believe that limit may have been selected to increase the amount government can spend. We believe the Legislature should consider a more appropriate and comprehensive measure of economic growth such as Gross State Product. (Personal income is actually a subset of Gross State Product). We also support replacing Personal Income with inflation and population growth, as recommended in the Governor’s Budget Compact.
Clearly the time has come to honor our taxpayers’ intentions from 1978 by strengthening our defense against excessive spending.
Would doing so be as simple as closing a few loopholes? Or, does Texas need a more comprehensive reform to truly reign in the growth of government?
Americans for Prosperity has commissioned its own studies on tax and expenditure limits by economist Barry Poulson and examined a number of studies that compared tax and expenditure limits across the country from numerous think tanks like the Texas Public Policy Foundation[iii][iv], the Mercatus Center at George Mason University[v], and the Cato Institute[vi]. These studies individually have come to the consensus that there is only one type of limit that has had a statistically significant effect in restraining state spending. It is a limit that allows spending to growth at the modest rate of inflation plus population growth every year. States that have adopted such a ceiling spend less than the national state average while still allowing for an appropriate rate of spending growth to provide for the necessary functions of government.
To give an example of the fiscally responsible rate the population plus inflation expenditure limit allows government to grow; Americans for Prosperity crunched a few numbers. We found that if Texas had adopted this limit in the year 2000, our state’s budget growth would have been much slower, reflecting a 21% increase in population[vii] during the last decade with an additional increase due to the modest inflation experienced during the 2000’s. This growth would be well below the dramatic increases in spending actually experienced. This limit would have accounted for hundreds of millions of dollars in savings for taxpayers compared to what the state actually spent, putting Texas on track to a fiscally responsible future and eliminating future needs to raise taxes.
Fortunately, Governor Rick Perry has recently promised to ask lawmakers like yourselves to pass this population plus inflation expenditure limit in the upcoming legislative session. The Governor’s proposal is definitely a step in the right. In addition to the excellent ideas contained in the Governor’s Budget Compact, we’d like to commend to this committee some statutory changes that will keep spending and taxation under control and preserve Texas’s economic competitiveness:
- Amend Government Code, Section 316.002(b) to specify either Gross State Product as the measure of economic growth, or inflation plus population growth, as called for in the Governor’s Budget Compact. Alternatively, the committee established by Section 316.005 could adopt either as the growth measure, pursuant to Section 316.002(c).
- Amend Section 316.003 to require publication of a time series showing how appropriations from tax revenue not dedicated by the constitution has changed over time. We also believe an explanation of what revenue is covered by the spending limit should be included in the future in a Legislative Budget Board primer or other such report to make the spending limit more transparent.
- Add language to Chapter 316 that clarifies that fees that are not appropriated to their intended purpose are considered taxes for purposes of the spending limit. Any appropriations made due to un-appropriated fees should be counted toward the Texas spending limit.
These would be good first steps toward improving the current system, but in addition to the proposals above, we suggest that Article VIII, Section 22 should be amended. All non-federal spending should be limited by inflation and population growth, as recommended by the Governor’s Budget Compact. This would ensure that the spending limit covers big-government boondoggles such as raiding the Permanent School Fund and the spending that occurred as result of tuition increases.
Whatever issues may exist at the state level, the situation in local government is far worse than in state government. County and municipal governments spend over $10 billion more than the state does every year and has over $19.7 billion more in debt[viii]. Today, Texas’ state and local spending amounts to over $205 billion per year and debt to over $232 billion.[ix] These estimates from the Census Bureau are from 2009, the latest year they have complete data, so the current numbers from the three years hence are doubtlessly much higher. A lot of that problem is due to the fiscally irresponsible actions of local government in Texas. Numbers like these show why the Legislature needs to stand up to big government advocates, taxpayer-funded lobby groups such as the Texas Municipal League and the Texas Association of Counties and provide more protections for property taxpayers. Maintaining Texas’s competitive economic climate requires putting the brakes on runaway local spending and taxation.
Comptroller Susan Combs recently issued an excellent report chronicling runaway taxation at the local level (“Your Money and the Taxing Facts”), and we highly recommend this report and the comptroller’s new texastransparency.org website.
We believe some of the ideas in the Governor’s Budget Compact, especially the population plus inflation ceiling should be extended to local government as well If the population plus inflation tax expenditure limit were extended to local governments in the year 2000, taxpayers would have again seen large cost savings. When combined with state level savings, the total decrease in spending would be a large down-payment on eliminating state and local debt.
Why ask the legislature to address local government growth? While some cities have put spending limits in their City Charters, several of them have failed to uphold the charter. We will cite two cases:
- First, the City of Houston had a charter amendment passed which contained a spending limit. The City exceeded the limit and after the City refused to honor their Charter, some taxpayers sued the City. While the taxpayers won in several venues, the Texas Supreme Court did not take the case citing it was not “ripe”. This was a disappointment to taxpayers who look for protection from an abusive government.
- Second, a court decision gave voters a resounding victory when Friendswood leaders were denied the ability to violate their city charter in issuing debt without voter approval.
The City of Friendswood charter prohibits issuing debt without voter approval except in emergencies. City leaders simply decided to ignore the charter and the voters. They filed in a Travis county district civil court citing state law permitting cities to issue debt, and asking if they have the power to do so without voter approval. Why would City leaders make an end-run around their voters? And why did City leaders think they were not bound by their own governing document?
In court, Judge Scott Jenkins, 53rd District Court in Travis County, had some other questions. At one point during the July 14 hearing, the judge said he was “mystified that (the city was asserting citizens) can’t limit government by city charter. There is no case law. I may be famous for this (ruling.)”
In short, citizens should not have to use their own resources to sue local government, which defends itself using that same citizens’ tax dollars, while denying citizens the right to limit the size of government.
For these reasons, Americans for Prosperity urges Texas legislators to heed Governor Perry’s call to adopt a population plus inflation expenditure limit in this current session. But, even further, we ask that you extend this limit to our local governments so the bulk of the spending crisis can be addressed, leaving future Texans with a fiscally sound state to enjoy for generations to come.
Thank you for the opportunity to testify. AFP looks forward to working with the Legislature to preserve our state’s economic advantage by limiting the growth of government.
[iii] David A. Hartman, “The Texas Tax Relief Act in Retrospect,” Texas Public Policy Foundation (2000) (Available online: http://www.texaspolicy.com/center/fiscal-policy/reports/texas-tax-relief-act-retrospect)
[iv] Talmadge Heﬂin & James Quintero, “Strengthen Texas’ Tax & Expenditure Limit,” Texas Public Policy Foundation (2010) (Available online: http://www.texaspolicy.com/center/fiscal-policy/reports/strengthening-texas%E2%80%99-tax-expenditure-limit)
[v] Matthew Mitchell, “TEL It Like It Is: Do State Tax and Expenditure Limits Actually Limit Spending?,” The Mercatus Center at George Mason University (2010) (Available online: http://mercatus.org/publication/tel-it-it)
[vi] Michael New & Stephen Slivinsky, “Dispelling the Myths: The Truth about TABOR and Referendum C,” Cato Institute (2005) (Available online: http://www.cato.org/publications/briefing-paper/dispelling-myths-truth-about-tabor-referendum-c)
[vii] “Population Distribution and Change: 2000 to 2010,” U.S. Census Bureau (2011) (Available online: http://www.census.gov/prod/cen2010/briefs/c2010br-01.pdf)
[viii] “State and Local Government Finances by Level of Government and by State: 2008-09,” U.S. Census Bureau (2011) (Available online: http://www2.census.gov/govs/estimate/09slsstab1b.xls)
[ix] “State and Local Government Finances by Level of Government and by State: 2008-09,” U.S. Census Bureau (2011) (Available online: http://www2.census.gov/govs/estimate/09slsstab1b.xls)