July 13, 2021, Harrisburg, Pa. — A new Commonwealth Foundation study investigating the impacts of Taxpayer and Expenditure Limits (TELs) has found that the policies can ward off tax increases and foster economic growth without forcing cuts to government spending.
TELs aim to control state spending growth by tying increases to a standard measurement or cap. The study shows effective TELs reduce the rate of annual spending budget growth by around 1% per year.
Legislatures are much more likely to increase taxes to cover overspending than reduce spending, according to research published in the Journal of Political Economy. An effective TEL works as a counterbalance to this habit and offers long-term blessings to taxpayers.
“Our analysis shows that while TELs reduce the growth of government spending, even the strictest TELs do not result in direct cuts to spending,” said Commonwealth Foundation Policy Analyst Tirzah Duren. “For states like Pennsylvania, an effective TEL could ensure a reasonable level of spending growth, remaining under state income growth and protecting against tax increases to cover deficits.”
The success of a TEL in holding spending to a cap, however, depends on various characteristics of the legislation.
Attributes that make TELS more effective are: 1) Adoption by referendum or constitutional convention; 2) Enactment as a constitutional amendment; 3) Application to spending; 4) Requirement of a supermajority to override; 5) Automatic refund of surpluses; 6) Prohibition of unfunded mandates.
“More effective TELs have multiple features that define the limits on state taxes and expenditures,” continued Duren. “Some of the most effective features stem from the authority of the people over their government, rather than relying on lawmakers to limit themselves. When a TEL is enacted via referendum and is a constitutional amendment, it provides a better control on overspending and tolerance of a structural deficit.”
The new study also highlights the disparity between government spending and prosperity. The literature review cites findings by the St. Louis Federal Reserve and others that government spending has no discernable long-term impact on job creation. Moreover, tax increases have a “strong negative effect on investment spending.” TELs, by limiting government spending growth, can effectively help to avoid economic stagnation caused by overspending and spur economic expansion.
Currently, the Pennsylvania General Assembly is considering the Taxpayer Protection Act (TPA). Embodied in HB 71 and SB 286, this TEL legislation has three of the above six indicators. If enacted, it could slow the rate of Pennsylvania budget growth by between 0.75 and 1.11%.
You can read the full study here.
Commonwealth Foundation experts are available for comment. Please contact Michael Torres at 850-619-2737 or mbt@commonwealthfoundation.org to schedule an interview.
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