Senate Tax and Expenditure
Limitation Study Committee
June 15, 2006
Testimony of Kelly McCutchen, Executive Vice President, Georgia Public Policy
Foundation
We appreciate the opportunity to testify today. The Georgia
Public Policy Foundation has supported a tax and expenditure limit for more
than 10 years, so we are very pleased that this idea is receiving serious
attention. I would first like to discuss why we think Georgia
should adopt a tax and expenditure limit, and then address some of the concerns
regarding how this idea should be implemented.
Georgia
is one of 20 states that has no structural impediment
to government growth. Although blindly following the lead of other states is a bad
idea, there are several good reasons for Georgia
to consider a tax and expenditure limit:
1. Stability.
We have just witnessed the folly of so many states that dramatically expanded
government spending during the go-go ‘90s, and then had to make equally
dramatic spending cuts and/or tax increases during the last recession. This
unpredictable stop and go spending pattern is not the best use of taxpayer
funds and often works to the detriment of those who truly need government
services – at a time when they need them most. A tax and expenditure limit
linked to a budget stabilization fund will eliminate this budget roller coaster
and create a predictable and steady spending pattern.
2. A tax and
expenditure limit will uphold the principle of limited government.
Population growth and inflation are reasonable adjustments to government
spending, but growth exceeding this level means a tacit endorsement of
inexorable growth in the size of our state government. What kind of a state and
a tax burden will we be leaving our grandchildren if we allow that to happen?
3. Transparency.
Increases in taxes and spending should be a conscious, public decision. A good
model is the Special Purpose Local Sales Tax (SPLOST) in Georgia,
which requires a public vote for a time-limited tax to fund specifically
identified projects.
4. A tax and
expenditure limit will address all levels of government in the state.
Simply limiting state spending would create the perverse incentive to pass
along unfunded mandates to local governments. Therefore, the spending limit
should also apply to all local government entities. This is particularly true
in Georgia
where more than half of total state/local spending is at the local level. In
fact, only five states are more decentralized. Also, per capita local spending
relative to other states is higher than state spending. Local spending per
capita in Georgia
increased from 30th in 1988 to 23rd in 2004 compared to Georgia’s
state spending per capita that ranked 45th in 2004.
5. Encourages tax
reform. Unless taxpayers are assured that a proposed “revenue neutral” tax
reform does not in reality become a large tax increase, major tax reforms will
not be politically possible. For example, shifting education
funding from local to state funds, as proposed in the last legislative session.
At the local level, we have enacted several measures designed to limit the
growth of government. Examples include a limit of 20 mills for property taxes
levied for education (unless you live in Atlanta)
and a limit of 7 cents sales tax (unless you live in Atlanta).
With a spending limit in place to protect against stealth tax increases, we can
do away with these restrictions and give local governments the flexibility to
design a tax system that best fits their needs.
I would now like to address some of the concerns that have
been brought up today over the last year concerning tax and expenditure limits:
·
Referenda are not practical and are too expensive.
o A super
majority requirement would work at the state level.
·
The “ratchet” effect is too harsh.
o The
“ratchet” refers to a requirement in the Colorado
law that automatically adjusts the budget baseline to last year’s revenues when
revenues fall below the previous year’s revenues. To a fiscal conservative, this a wonderful thing because it is difficult enough to
reduce the rate of growth of government, but actually reducing the size of
government is almost impossible. However, we would urge you not to allow this
issue to cause you to avoid a tax and expenditure limit. There are
alternatives, such as using a three-year moving average as the base rather than
the lowest point. Simply freezing the base so that it does not decline would be
another alternative. Luckily, Georgia
would be enacting this reform as a state that is relatively low in spending
compared to other states. Our primary concern is the rate of future growth.
·
General population growth is not a realistic metric since many programs
are growing faster, e.g. the Medicaid population grew at three times the rate
of general population from 1991 to 2004.
o Some of the
increase in population in programs such as Medicaid were due to program
eligibility expansions. Whether it is a policy decision or simply a growing
population, lawmakers will always have to ability to propose a higher level of
spending to adjust to unforeseen circumstances, market conditions or federal
mandates.
·
General inflation is not a realistic metric since many programs are
growing at a faster rate than general inflation, e.g. form 1993 to 2004 the
general inflation rate was 33.9%, the medical inflation rate was 60.7% and the
education inflation rate was 94.4%.
o Spending
more money doesn’t equate to higher quality. We spend a tremendous amount of
money on Medicaid, yet the quality is poor. A better example is education. Over
the last 20 years Georgia
increased per pupil spending more than any other state and it did not improve
student achievement. Per pupil spending moved from 44th to 22nd
highest during this time period.
o Again, if
critical programs are in danger then it should not be difficult to make the
case for a supermajority vote.
·
If a spending limit had been in place ten years ago, we would not have
been able to fund teacher pay increases or tough on crime legislation.
o Wrong. If
these two issues couldn’t get a two-thirds
supermajority I don’t know what would. We cannot emphasize enough – there is
nothing that we are proposing that would rule out spending from increasing –
even dramatically – as long as it received a supermajority vote in the
legislature or a majority support of voters.
·
A spending limit would put pressure on all
state programs, not just high growth programs.
o Yes, and
this is a good thing. Government should face constant pressure to identify its
core functions, prioritize spending and find efficiencies. Again, the
alternative is to accept that government will grow inexorably over time. There
are unlimited “good causes”, but part of your job as legislators is to make
those tough decisions.
·
State spending is not out of control.
·
We agree, but it could be very quickly. From
FY91 to FY04, the budget grew by $1.5 billion more than population and
inflation thanks to teacher salary increases, prison construction and property
tax relief to local governments. It would have grown by much more if not for $1
billion in tax cuts. A spending limit is simply an insurance policy that we
will have this fiscally conservative approach in the future.
·
Lottery funds should not be included in the spending limit. We agree.
·
How should refunds be allocated?
·
The state would probably offer credits toward
state income taxes, local governments would probably offer credits toward
property taxes. Sales taxes are paid at both levels, but are hard to figure out
who paid how much. A better approach would be to reduce the sales tax rate.
·
Another option would be moving revenues to a Tax
Reform Account after the Budget Stabilization Fund is full. This fund would
have to be zeroed out the next year and used for tax reductions, rebates or
debt reduction.
·
Would applying a tax and expenditure limit to
local governments be a violation of local control?
o No.
The primary goal of a tax and expenditure limit is making decisions to increase
taxes and/or spending more transparent. If this legislation mandated a cap on
local spending without giving local government the ability to override that
cap, it would be a violation of local
control. But we would propose that if local elected officials want to increase
the size of their government over and above a certain spending limit, they
simply must gain approval of the voters, just like in a SPLOST election. This
is the ultimate form of local control.
·
Do we have unmet needs in Georgia?
o Certainly.
But to look to government to solve all of our unmet needs is a recipe for
disaster. Also, we can meet more needs without necessarily spending more money.
Public charter schools like Tech High, just down Memorial
Drive from where we are sitting, are meeting needs
for less money. They have the highest test scores in the City of Atlanta,
are serving predominantly low-income, minority students and are doing it with
almost half the money spent in other similar schools. Health care is another
example. Health care spending is gobbling up more and more of the state budget,
but we still have far too many Georgians with chronic diseases who are
undiagnosed and untreated. These individuals with diabetes, high blood pressure
and other conditions could be stabilized with the correct medication, but all
too often we end up spending more money by waiting until they develop costly
complications. We also cannot simply look at what we are spending now and
assume it is all necessary. The recent Medicare bill is a good example. It is a
good idea to provide funding for those elderly Americans who cannot afford
necessary drugs, but why do we need to subsidize those who can afford it?
If you look at any government over a long period of time, I
can’t think of a single one that hasn’t gotten bigger. We have a large body of
evidence and research that suggests that big government is not good for
economic growth and job creation, economic and individual opportunity, or even
the environment – just look at the environmental problems in Eastern Europe and
China. Ensuring that we abide by our Founding Fathers desires for a limited
government is just as important today as it was 230 years ago, particularly
since we now have seen the results of failing in this task. Our legal system
provides for a presumption of innocence until proven guilty. We believe that in
recognizing the principle of limited government, the burden of proof should
rest with those who wish to expand government and there should be open and
public debate when we make these decisions.
[See Buffer
Taxpayers From Government Spendthrifts for a more
detailed study on tax and expenditure limits specific to Georgia.]
