States across the country continue to struggle with balancing their budgets. Even worse, many states have accumulated mountains of debt (that taxpayers are on the hook for) because of years of overspending, mostly due to out-of-control public employee pensions and benefits. Unfortunately, most states take the easy way out and raise taxes to cover budget shortfalls. However, this creates a vicious cycle that drives residents and businesses to flee, which decreases the tax base, causing lawmakers to raise taxes even higher. As more and more people and businesses leave, the cycle continues.
Louisiana currently ranks 44th in the Tax Foundation’s 2019 State Business Tax Climate Index, a study that compares states across several tax benchmarks. Louisiana ranks lower than many of its neighbors, including Texas (15th), Oklahoma (26th), and Mississippi (33rd). No wonder from July 2017 to July 2018, 10,840 residents fled the state. No doubt, Louisiana’s burdensome taxes most likely contributed to the exodus. For Louisiana to remain competitive (and halt the exodus), it must reform its tax code to encourage investment and economic growth while bringing spending under control.
In 2018, Louisiana attempted to address its budget deficit with a temporary sales tax hike which will lapse in 2025. This temporary increase means the Pelican State currently has the second highest state sales tax rate in the country, according to the Tax Foundation. There are already proposals in the Louisiana House to roll back the sales tax hike two years early. Although the tax increase has generated some revenue and reduced the budget deficit, it has done so mostly at the expense of lower-income Louisianans (the sales tax is a highly regressive tax). Further, this tax increase is a temporary fix at best, because it does not address the state’s enormous spending problem.
In late May the Senate Finance Committee advanced House Bill 147, which seeks to limit how the next legislature spends revenue in the general fund. Introduced by State Rep. Rick Edmonds (R-Baton Rouge), H.B. 147 would restrict general fund spending to 98 percent of the official revenue forecast. The bill declares the remaining 2 percent surplus, and per the Louisiana Constitution, these funds are designated for a limited number of expenses, including infrastructure, paying down retirement debt, and adding to the state’s rainy day fund. The reform would not go into effect during the upcoming budget year. It is estimated the spending limits could redirect an estimated $834 million from the general fund into surplus spending.
Opponents of H.B. 147 argue the limits are unnecessary and that lawmakers already have the capacity to spend less than is available in revenue. The reality is that most legislatures do not do this; politics often drive lawmakers to spend every available tax dollar. Adding a spending limit will effectively keep more money out of the hands of politicians and into the pockets of families and job creators, where it rightfully belongs in the first place.
Increasing government spending does not generate economic growth. Allowing spending to increase over time without limit will only encourage a push for more tax revenue, which places a bigger burden on families and businesses and undermines the economy. A spending limit would force Louisiana lawmakers to closely monitor and actually limit state spending, thereby balancing the budget from the spending side, while limiting the need for more revenue via tax hikes.
The following documents examine tax and expenditure limits in greater detail.
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 on sound 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) from 1970 to 2010 to the empirical question of the effectiveness of tax and expenditure limits, 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 the inflexibility inherent in their budgets 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.
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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