Consequences of Constitutional Revenue and Spending Limits La Follette School Conference on Taxing and Spending Limits in Wisconsin January 19, 2005 Andrew Reschovsky Robert M. La Follette School of Public Affairs University of Wisconsin-Madison

2 What is the Taxpayer Bill of Rights? A constitutional amendment which would: Limit increases in state, school, county, and municipal spending by placing a set of rules (or formulas) in the constitution Require referenda for exceeding spending limits, for any tax changes that cause net revenue gains, and for most borrowing decisions.

3 But, Government Spending Hasn ’ t Grown Any Faster than the Economy Over the Past Decade

4 Alternative Ways that TABOR Could Limit the Growth of Public Spending 2005 Assembly Joint Resolution (Lasee/Wood): Growth in state spending Inflation (CPI) + population growth Growth in K-12 education spending Inflation (CPI) + % change in enrollment Growth in county and municipal spending Inflation plus % change in property tax base due to new construction Senate proposal (July 2004) Growth at all levels of government limited to 90 percent of growth rate of state personal income

5 Predicting the Impact of TABOR on Government Spending No one can predict the future with certainty My approach is to ask: If TABOR had been implemented in 1985, how much would governments be allowed to spend today compared to actual spending?

6 The Impact of TABOR (Assembly) on State Government Spending

7 If TABOR Was Enacted 20 Years Ago, Which State Programs Would Disappear? FY 2003 spending was $25.5 billion TABOR limit would have been $17.1 billion To eliminate $8.4 billion in spending one could eliminate all General Fund spending on K-12 education, on the UW System, and on Shared Revenue, and still would need to reduce spending by $1.5 billion

8 State Spending Relative to Income With and Without TABOR (Assembly)

9 The Impact of TABOR (Senate) on State Government Spending

10 Will Lower Spending Lead to Cuts in Public Services? Evidence from other states shows that property tax limits have led to a decline in education quality Careful research conducted on impacts of Proposition 13 (CA) and Proposition 2 ½ (MA) “ A growing body of research is producing a consistent conclusion; imposition of tax and expenditure limits results in long-run reductions in the performance of public school students. ” (Downes and Figlio, National Tax Journal)

11 Will Lower Spending Lead to Cuts in Public Services? (cont.) Since TABOR passed in 1992, public services have declined in Colorado (No rigorous econometric research yet, but plenty of circumstantial evidence) State support for higher education (relative to income) has fallen by 55% The proportion of low-income children without health insurance nearly doubled in CO, while it declined for the nation as a whole Lots of funding cuts in the health area

12 Why Might Public Services Decline Even Though TABOR Allows Spending to Grow? Costs (the minimum amount of money needed to provide a given level of public service) are likely to rise faster than the constitutionally-imposed limit But, why?

13 Why Might Public Services Decline Even Though TABOR Allows Spending to Grow? (cont.) Costs may rise faster than limits because To attract teachers and health care professionals requires wages that reflect productivity growth in the private sector, thus over time public sector salaries must grow faster than the inflation rate Other input costs often rise faster than the CPI & personal income, e.g. heating fuel, health insurance premiums

14 Why Might Public Services Decline Even Though TABOR Allows Spending to Grow? (cont.) Costs may rise faster than limits because Aging population will increase the costs of providing health care, especially Medicaid-funded long-term care costs To reduce its deficit, the federal government will shift more costs of services to state and local governments Evidence that NCLB is a seriously under-funded mandate Proposals to limit federal Medicaid spending

15 Why Might Public Services Decline Even Though TABOR Allows Spending to Grow? (cont.) As Dr. Knickman has indicated, as long as health care spending goes up faster than the limits, TABOR will force cuts elsewhere in the budget, with the most likely cuts in K-12 education Higher education Environmental protection Public safety Social services

16 The Impact of TABOR (Assembly Version) on School District Spending

17 The Impact of TABOR (Assembly) on Spending in the Manitowoc School Distr.

18 The Impact of TABOR on Education in Manitowoc MPSD is a relatively low spending, low tax rate district per pupil spending of $8,186 is about 2% less than average of K-12 districts property tax mill rate of 7.91 is nearly 20% below average TABOR will penalize district ’ s past frugality Infusion of Southeast Asian immigrants will raise the costs of education, adding to fiscal pressure

19 The Impact of TABOR on Spending in the Madison Metro School District

20 TABOR (Assembly) Would Have Been More Restrictive than the Revenue Caps

21 The Impact of TABOR on Outagamie County Spending

22 The Impact of TABOR on La Crosse County Spending

23 The Impact of TABOR on City of Milwaukee Spending

24 The Impact of TABOR on City of Beaver Dam Spending

25 Will Spending Limits Deliver Significant Property Tax Relief? NO, lowering property tax rates provides completely untargeted tax relief Non-residents share tax relief and substantial amounts of tax relief go to those not facing high property tax burdens, i.e. taxes relative to their income Not all households face high property tax burdens DOR study showed that those with modest income and many elderly face above-average burdens

26 Average Residential Property Tax Burdens by Income -- Wisconsin, 2001

27 Won ’ t Making Spending Decisions by Referendum Lead to Better Decisions? Making careful decisions on complex budget issues requires an investment of time that most voters don ’ t have Representative democracy has served the state well for more than 150 years Elections can be unduly influenced by special interests with lots of money for media advertising With low election turnout the norm, referenda don ’ t guarantee a greater “ voice to the people ” unless all citizens are well informed and everyone votes

28 What is Wrong With Placing a Limit on the Size of Government? State and local governments mainly provide services, e.g. education, public safety, rather than goods In the private sector, services are becoming an increasing share of personal consumption expenditures Between 1984 and 2003, the share of services grew by 15% The share of spending on medical care grew by 38%

29 What is Wrong With Placing a Limit on the Size of Government? (cont.) As services become more important in the economy (and the relative prices of goods drops), future generations may well want to devote a larger share of their income to government service provision Thus, limiting the size of government now, could actually reduce economic well-being in the future

30 What is Wrong With Placing a Limit on the Size of Government? (cont.) TABOR would place today ’ s standards about the appropriate role of government into the constitution, thereby imposing these standards on future generations

31 Wisconsin ’ s Fiscal Problems are Complex, Beware of Simple Solutions Wisconsin has fiscal problems: We need to reform our systems of school finance and of Shared Revenue There are calls for providing meaningful property tax relief These are complex problems without simple solutions

32 Wisconsin ’ s Fiscal Problems are Complex, Beware of Simple Solutions (cont.) Constitutional limits, like TABOR, are simple, blunt instruments By design, they are inflexible and will almost certainly have unintended consequences They will probably make finding solutions to existing problems harder