Many states have accumulated massive amounts of debt due to years of overspending combined with high costs associated with state employee pensions and benefits. Lawmakers across the country are now considering raising taxes to help pay for these costs, but higher tax rates burden families, deter economic growth, and can reduce tax revenues in the long term. Government spending is not a cost effective way of generating economic growth.
When an economy is performing at a high level, surging property values, strong retail sales, and other positive economic factors are used to justify raising tax rates to expand government. But this is tremendously problematic, because once an economy goes through a difficult period, tax revenues inevitably drop and programs with locked-in spending are put at risk without addition tax increases. Those additional tax increases often hurt the economy, creating a negative, government-induced economic cycle.
The only way to fix these problems is for states to restore correct incentives to the system, which can be done in a number of ways. One approach is to require a supermajority vote in the state legislature to approve tax increases. Florida Gov. Rick Scott (R) is now working with the Florida Constitution Revision Commission to do just that. Scott’s plan is to pass a new state constitutional amendment that would require a supermajority of state lawmakers in the legislature to approve a tax hike or a new tax. If approved, the amendment would be on the 2018 ballot for consideration by the public. The 37-member commission will be meeting to review proposed changes to the state’s constitution in the coming months. If the amendment reaches the ballot, it would require 60 percent of voters to approve to become law.
If the measure were to be approved, Florida would become the 16th state to require a supermajority to approve a tax hike or a new tax. The most recent state to do so was California, which passed its measure in 2016 as part of activists’ “Stop Hidden Taxes” initiative.
Supermajority requirements for tax votes are not entirely new to Florida, where the current law already includes several limits on imposing taxes. The Florida Legislature must get approval from a supermajority (three-fifths) of each legislative chamber before imposing any corporate tax increase. Florida law also requires any proposed constitutional amendment imposing a new state tax or fee must be approved by two-thirds of voters in the next election held after such an amendment is considered.
In his testimony before the Maryland House Committee on Ways and Means on a similar supermajority bill, Joseph Henchman of the Tax Foundation argued imposing a supermajority threshold for tax votes empowers the minority in legislatures and ensures any tax passed has reached consensus and received full consideration. “The additional consideration also sends the signal that tax increases will not happen suddenly, and the additional legislative give-and-take reduces the chance that a minority will alone bear the burden of higher taxes. This increased stability in turn furthers the certainty required for investment, capital formation, and job creation,” Henchman wrote.
In a 2014 article, Soomi Lee of the University of La Verne and the Claremont Institute of Economic Policy Studies examined whether supermajority vote requirements (SMVR) to raise taxes in California’s constitution suppresses state tax burdens. Lee examined the causal effect of SMVR on tax burdens in California between 1979 and 2008 and found, “SMVR reduced the state nonproperty tax burden by an average of $1.44 per $100 of personal income, which is equivalent to 21% of the total tax burden for each year. The effect of SMVR was immediate after its adoption, but has abated over time.”
Supermajority requirements are a solid first step toward reining in out-of-control state budgets. States must learn to live within their means and also adopt reforms that limit spending. Controlling spending 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 cover tax reforms and supermajority vote requirements in greater detail.
The Effect of Supermajority Vote Requirements for Tax Increase in California: A Synthetic Control Method Approach
In this study, Soomi Lee of the University of La Verne and the Claremont Institute of Economic Policy Studies examined whether supermajority vote requirements needed to raise taxes in California’s constitution suppresses state tax burdens.
Why a Tax Limitation/Balanced Budget Amendment Is Needed to Control Spending
Daniel Mitchell of The Heritage Foundation argues in this report a “strong provision to limit taxes – such as a two-thirds supermajority requirement to raise taxes – would help ensure that politicians could not evade the amendment’s intent by simply replacing debt-financed spending with tax-financed spending.”
Supermajority Taxpayer Protection
Peter Ferrara writes for Americans for Tax Reform about supermajority requirements and how they have “proven highly effective both in protecting taxpayers and boosting the economy. Polls and actual votes taken in referenda show the provision is highly popular with voters,” wrote Ferrara.
Supermajority Vote Requirements
The National Conference of State Legislatures examines supermajority vote requirements across the country and how they have been applied in different states.
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.
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.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, Heartland’s director of government relations, at [email protected] or 312/377-4000.