States across the country continue to struggle with balancing their budgets as a result of increasing spending and a lagging economy. Many states also have accumulated massive amounts of debt that taxpayers will have to pay due to years of overspending combined with state employee pensions and benefits. Higher tax rates then burden families, weaken businesses, and act as a further drag on the economy, creating a cycle of tax hikes and revenue shortages.
In 1992, Connecticut included a spending cap in the state’s constitution. However, the cap, which was passed as part of a deal to appease angry voters after the state created a state income tax, remains incomplete because the state legislature has not yet defined key terms in the definition of the spending cap.
Despite these problems, the cap has kept spending from growing out of control, and now, 17 bills have been introduced by state lawmakers that would clearly articulate the missing definitions, firmly establishing what is applied and what is exempted from being included in the cap. The cap has always allowed for loopholes, and some critics hope the new reforms will strengthen it, putting the state on even firmer fiscal grounds.
Connecticut’s constitutional and statutory spending caps are set annually and based on a lagged five-year average of growth in state personal income, or the percentage increase in inflation during the preceding 12 months, whichever is greater. Legislators are allowed to exceed the cap if the governor and legislature agree to do so and a budget emergency is declared. (This occurred in 2005 and 2007.)
The main problem with the incomplete nature of the cap is the tendency of state lawmakers to use loopholes in the current law to hide spending from being counted towards the cap, allowing for spending above and beyond what the cap would allow. The main culprit has been the state’s retirement funds. Similar to the situation in many states, Connecticut has fallen behind on its long-term pension obligations and is now racing to cover the increased costs.
Gov. Dannel Malloy’s (D) cap reform proposal would define all three areas of the spending cap while exempting debt service, the budget reserve fund, federal mandates and unfunded liabilities in the state’s retirement systems. It also maintains a loophole to bypass the cap, allowing for a base adjustment in the cap when expenditures are shuffled between appropriated and non-appropriated funding sources. While some flexibility makes sense, the state’s constant bypassing of the cap proves more stringent definitions without numerous exceptions are needed. These reforms would take the teeth out of the cap, allowing legislators to hide millions of dollars of spending.
In a study on the spending cap, Suzanne Bates of the Yankee Institute for Public Policy argues moving pension payments out from under the cap hides the true cost of the state’s pension mismanagement. “Moving payments to the state’s pension funds out from under the cap will make this cost to taxpayers less transparent. Cities and states across the nation are struggling to pay down their pension debt,” wrote Bates. “Making state employee pensions less transparent by moving them out from under the cap is a step in the wrong direction.”
Joe Horvath of the Yankee Institute argues there are proposals for spending caps Connecticut could use as a model. Horvath points to a proposal now being considered in Texas, in which the state spending cap would be applied to the entire budget and the rate would be determined as the smallest of three metrics: state population growth plus inflation, total state personal income, or total gross state product.
The cap is popular; a 2015 poll of Connecticut residents conducted by the Yankee Institute found “82 percent of respondents still believe that the state should have a cap on state spending.” A strong spending limit would force the government to more closely monitor and limit state spending, thereby properly balancing the budget while limiting the need for future tax hikes.
The following documents examine tax and expenditure limits in greater detail.
Back on Track: Budget Reforms for the Long Run
In this Policy Brief, Joe Horvath of the Yankee Institute outlines several tools Connecticut legislators should use to rethink how the state budgets and spends. “Comprehensive, lasting reform is a better way forward than the cycle of tax increases and emergency line item cuts to services,” wrote Horvath.
Connecticut’s Pension Debt and the Spending Cap
In this Policy Brief, Suzanne Bates, policy director at the Yankee Institute, examines Connecticut’s growing pension problem and how it could affect the state’s spending cap. “Now is the time for lawmakers to reform benefits for state employees, so that the state can get a handle on its pension debt and get onto a more fiscally viable path,” wrote Bates.
State Budget Reform Toolkit
The American Legislative Exchange Council outlines a set of budget and procurement best practices to guide state policymakers as they work to solve the budget shortfalls. The toolkit will assist legislators in prioritizing and more efficiently delivering core government services by advancing free markets, limiting government, and promoting federalism and individual liberty.
Policy Tip Sheet: Spending Reforms
The Heartland Institute outlines several reforms state legislators can take to address spending problems, including privatization, tax and expenditure limits, and retirement reforms.
Balancing State Budgets the Smart Way
Joseph Henchman of the Tax Foundation examines an array of options states can use to remedy both short-term and long-term fiscal woes and put their budgets back on sounder legal footing.
Decade of TABOR—Ten Years After: Analysis of the Taxpayer’s Bill of Rights
Colorado’s TABOR (Taxpayer’s Bill of Rights) is a constitutional amendment limiting taxes and spending. Its stated mission is to “reasonably restrain most of the growth of government.” It allows only tax rate increases approved by voters, and although fees are not directly restricted, state government spending is limited to the growth of Colorado’s population plus inflation in the prior year.
State and Local Spending: Do Tax and Expenditure Limits Work?
This empirical analysis by Benjamin Zycher of the American Enterprise Institute applies data from 49 states (excluding Alaska) over the period 1970–2010 to the empirical question of the effectiveness of TELs, which display a wide variety of features across the states.
Tax and Expenditure Limits for Long-Run Fiscal Stability
Emily Washington and Frederic Sautet of the Mercatus Center examine how states can correct for the inflexibility inherent in state expenditure systems to respect taxpayers’ desires for government services over time. Although they are not a perfect solution, binding TELs prevent policymakers from increasing state spending beyond voters’ willingness to pay for government services, the authors argue.
What Is the Evidence on Taxes and Growth?
In this Tax Foundation study, William McBride examines the effects of tax policy on economic growth. He finds the literature on the topic demonstrates long-term economic growth is to a significant degree a function of tax policy. If governments seek to spur investment, he writes, they should lower taxes on the earnings of capital. If they seek to increase employment, they should lower taxes on workers and the businesses which hire them. The report also includes a discussion of the effects of progressive tax systems.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
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