Bacon's Rebellion

Democracy Thrives in Sunlight

A New Look at TELs

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by

James A. Bacon
in

The Rockefeller Institute of Government has a new report on the effects of state-level tax and spending limit laws. It’s worth a read, considering the issue has been brought forth a couple of times in the General Assembly but, as with so many ideas, died a silent death in the Senate Finance committee.

Here’s a sample:

We also found that TELs may have different effects on different areas of spending. For instance, when the stringency and restrictiveness of state-level TELs are taken into account, state-level TELs have significant negative effects on the level of state and local public safety spending. Also, when the stringency and restrictiveness of state-level TELs are accounted for, state-level TELs have significant positive effects on the share of transportation spending in total spending (though not its actual level). Our study found no statistically significant impact of state-level TELs on spending in four other functional areas: education, health and hospitals, quality-of-life and amenities, and public welfare.

The analyses also found that state-level TELs have different distributional effects across revenue sources. Not unexpectedly, after the adoption of state-level TELs, state and local governments become less dependent, in terms of revenue share, on property, individual income, and corporate income taxes. Interestingly, they become more dependent for their revenues on fees and charges, such as sewerage charges and lotteries. TELs do not appear to have a significant impact on sales taxes. Finally, they appear to reduce federal intergovernmental transfers to states, perhaps because states are less able to put up state matching funds in order to draw down additional federal dollars (as is the case for Medicaid).

Interesting to note toward the end is the author’s statement that TELs shift revenue sources from the “progressive,” like income taxes, to the “regressive,” meaning fees.

Fees, while they can be regressive for some, may be more rational for the whole, based on the idea of “users pay.” It is somewhat disturbing to see governments become more reliant upon lotteries for funds, as lotteries are perhaps the most regressive, though purely voluntary, forms of taxation (and here is an item on a legal case in North Carolina regarding whether lotteries are actually taxes).

Virginia’s political class has been less than warm to the idea of a TEL in any form. But, as the authors of the study note, most TELs on the books were passed during fiscal downturns, though few have been adopted in recent years. If Virginia follows its pattern, a fiscal bust may happen sooner than people think. Will a Virginia TEL find new life, or any life at all, if that happens?

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2 responses to “A New Look at TELs”

  1. Jim Bacon Avatar
    Jim Bacon

    Despite my dismay at out-of-control state spending in Virginia, I see tax- and spending-limit laws as a last resort. Imposing artificial limits on tax or spending increases might exert some constraint on taxes and spending, but it won’t halt the political pressure for more spending. Inevitably, politicians will start to game the system. Instead of raising taxes, they’ll borrow more. They’ll reclassify taxes as “fees” or “penalties” or something other than what they are(as the General Assembly has already done in recent years). They’ll start playing accounting games — changing actuarial assumptions on the state pension, fund, for example, allowing the state to reduce its annual contribution. After a decade or so of hiding problems, the budget will be a shambles.

    Furthermore, artificial spending caps will only reinforce the tendency to short-term thinking. “Oh, we can’t spend that money no matter how much it might save down the road because it isn’t in our budget this year.” Politicians will kick the can down the road. I can envision the state signing real estate leases, for instance, that might save a bit of cash up front, only to cost more down the road.

    We desperately need to exert some kind of control over spending. BUt let us not deceive ourselves that spending limits are a substitute for creativity, discipline and the setting of priorities.

  2. Norman Leahy Avatar
    Norman Leahy

    Jim,

    I agree that spending caps might tend to enhance short term thinking.

    But it’s your last observation that strikes me as self-deception. The political class is, if nothing else, extremely adept at finding ways creative ways to spend money (al those bills in the drawer, don’t you know). They are also decidedly unable to set priorities. Priorities require making choices, the sort of choices that can lead to electoral discomfort and thus are less likely to ever be pursued.

    As for discipline, well. It’s easier to housebreak a puppy than it is to enforce discipline on a pol facing a surplus.

    There are remote mechanisms toenforce such discipline, such as the ballot box. But I’m not convinced the public, with its biases and misconceptions about what real fiscal discipline looks like, would be of any real help.

    And let’s not forget to mention that gerrymandering has reduced even this imperfect tool to near irrelevance in many cases.

    TELs are not a cure-all. Far from it. If anything, they are an admission, be it by legislators or by the people through referenda, that the political class is, to a degree, untrustworthy. That’s deeply unfortunate.

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