Road Map Needed for State's Fiscal Future

Posted on May 06, 2003 | Type: In the News
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When you're lost, a good road map sure can come in handy. As Arizona enters its third year of fiscal shortfalls, we might do well to look to other states to see how they are dealing with their fiscal crises.

In order to get out of the present budget maze, we need to understand how we got lost in the first place. Recent budget history indicates that rapid spending increases are to blame for Arizona's budgetary woes. During the past 20 years, per capita state expenditures in Arizona have grown considerably, consistently exceeding the inflation rate. Between 1990 and 2000, Arizona's general fund doubled in size.

Taxpayers who are serious about limiting budgetary growth and avoiding fiscal crises in the future should impose some fiscal discipline on their state legislators. In the past, Arizona voters have been very receptive to fiscal limits, enacting limitations on government on three occasions during the past 25 years.

Unfortunately, Arizona's fiscal limits have been unable to limit expenditure growth. The 1978 limit capped expenditure growth at 7.41 percent of personal income, but that was far too high to effectively leash spending. Propositions 106 and 107, passed in 1979, have been effective at limiting property taxes, but the state has responsded by increasing other taxes. Finally, although the 1992 supermajority requirement has enjoyed great success in blocking tax hikes, it did little to restrain budgetary excesses during the boom of the 1990s.

Looking around at other states for effective tax and expenditure limits, two features stand out: limiting spending increases to the rate of population growth plus inflation, and refunding excess revenues to taxpayers. In a regression analysis using budget data from all 50 states from 1972 to 1996, I found that limiting increases in expenditures to the rate of population growth plus inflation reduces state and local expenditures by $115 a year per capita. If the limit includes a taxpayer refund provision but does not cap expenditure growth at population growth plus inflation, the limit reduces state and local expenditures by $40 a year per capita. If a state has neither provision, its expenditures increase by $15 a year per capita.

Washinton state's Initiative 601 (I-601), passed in response to a 1993 tax hike by the legislature, limits spending increases to the rate of population growth plus inflation, but does not have a provision for taxpayer refunds. In the four y ears before I-601 took effect, spending increased by an average of 17.3 percent a year. In the four years after the limit took effect, spending increased by only 8.6 percent a year. According to Census data, Washington ranked 47th among the states in per capita expenditure growth during the 1990s. I-601 also helped to reduce taxes on Washington residents by $1.3 billion, and resulted in abolition of the car tax. One shortcoming of I-601 is that it is statutory, not constitutional, which makes the initiative subject to legislative override.

A more effective limit is Colorado's Taxpayer's Bill of Rights, a constitutional amendment that limits spending growth to population growth plus inflation and mandates immediate refunds of surplus revenues. As a result of the measure, Colorado residents received tax rebates every year between 1997 and 2002, totaling more than $3.2 billion.

Of course, the Colorado and Washington limits have not made those states deficit-proof. In 2002, the Washington legislature suspended the I-601 limit, and in 2001, Colorado voters enacted a massive override of their limit. But Colorado and Washington are head and shoulders above states such as California, New Jersey, and Massachusetts, which have provided far less in the way of tax relief and are currently experiencing much larger deficits.

If Arizona had enacted a Colorado-style spending cap in 1994, its cumulative budget deficit for 2003 and 2004 would be only $792.4 million, instead of the actual $1.5 billion. And during the past eight years, Arizonans would have received a total of $4 billion in tax rebates.

Colorado's Taxpayer's Bill of Rights and Washington's I-601 have placed meaningful limits on the growth of government, provided tax relief for residents, and placed those states in a strong fiscal position relative to others. Arizona residents can avoid fiscal crises in the future by following the examples set by Colorado and Washington.

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