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?