One Man's Trash

Norman Leahy

State spending out of control? Enact a Tax and Expenditure Law that caps spending at the rate of inflation and population growth. If pols are unhappy with the limits, they can... 

Tell It to the TEL

The red ink is rising around Virginia’s budget. Politicians are scrambling for items to trim and pare, while others are clucking their tongues in self-satisfaction.

They have no right to do so. Behind every budget crisis, including this one, there is a bipartisan gaggle of pols who gleefully voted to increase spending, even when prudence and common sense, dictated that a bit of restraint was in order.

That’s why it was interesting, if also ironic, to read this bit from House Appropriations committee Chairman Lacey Putney. It’s not our fault we’re this hole, it’s the process that’s broken:

In 2004, then-Governor Warner stated that the tax increase approved by the General Assembly would align our longer term revenue and spending requirements. Clearly, this did not work. The fact that state spending continues to grow faster than revenue growth is not indicative of the need for more revenue, rather the need for spending reform. Last session, Governor Kaine continued to press for new spending initiatives despite the looming economic downturn. Obviously, creating new programs without a corresponding reduction elsewhere is a recipe for fiscal disaster.

It’s a fair assessment, if one ignores the central role legislators play in the budget process.

So if Virginia needs spending reform, what should it look like?

For starters, it must, of necessity, take a measure of discretion away from the political class. And for some (including me), that means instituting a tax and expenditure law.

TELs generally work around a couple of principles: Spending increases are limited to some combination of inflation and population growth and any excess revenues are rebated to the taxpayers. These are tough laws, designed to keep politicians on a very short budgetary leash. Because they tend to take a lot of the fun out of being a legislator, politicians generally oppose them, as do the numerous interest groups and associations dedicated to milking the public purse.

How would a Virginia TEL work? A few years back, Stephen Slivinski and Michael New wrote a study on just that topic for my employer, the Virginia Institute for Public Policy:

A TEL for the Commonwealth of Virginia should include limits on the growth of spending and revenue. That is to say, state spending and revenue should not grow in excess of the sum of population growth plus inflation. The source of data for this calculation (such as the U.S. Census Bureau) should be clearly outlined in the amendment to avoid political gaming of the underlying benchmark for the TEL.

Defining what spending the limit restricts is vital. Putting a cap on too narrow a base of expenditures, or only for particular “on-budget” expenditures, will encourage politicians to move more spending “off-budget” or increase spending in noncapped categories. Thus, it is important to define the spending subject to the cap broadly. The spending that is capped should include all state fiscal year spending except expenditures for refunds of any kind or expenditures of money received from the federal government; money received as grants, gifts or donations, which is expended for a purpose specified by the donor; money that is collected for another government; and money received for pension contributions by employees and pension fund earnings, reserve transfers, or expenditures.

They go on from there to talk about what should be done with any surpluses, how to define who gets how much of a refund and the political obstacles such a limit faces in the state. The biggest of these is what to do if the legislature wants to increase the spending limit:

The final important element of a Virginia TEL would require the state legislature to ask for approval from voters to raise the spending limit. Allowing legislators to overturn the limit, even by a supermajority vote—such as two-thirds of both legislative houses, as some states allow—would weaken the limit. If there is one thing that most legislatures across the nation have proven, it is that there exists a broad bipartisan consensus in favor of big government. Getting a supermajority for the destruction of a spending cap is too easy. Voters must be consulted when government wants to undertake expensive new duties: they must be the ones who make the ultimate decision about whether to raise the spending cap or not.

Ah, those pesky voters. They can’t be trusted to increase spending, can they? That depends. When a matter is convoluted and the benefits ill-defined, as they were in the regional tax referenda of 2002, voters will tend to vote “no.” But when things are clearer, and the benefits more concrete, as they have been with the various bond referenda for school and university construction, park maintenance and more, they tend to vote “yes.” 

So it all comes down the sales pitch. If the state needs more police officers, school teachers and its buildings need new roofs, then people are probably likely to agree. If the need is for more roads, or a new pre-k program, then the sale will be more difficult (particularly for the current crop of salesmen).

Taxpayers are not reluctant to be taxed more, or to have the state spend more, if they perceive that their money is being used wisely. And that’s the rub: Virginia’s political class –- Republican and Democrat alike -- has done little to earn taxpayer trust on taxes or spending in the last dozen years. Republicans mouth their support for low taxes and less spending, but have voted for huge increases in each. Democrats say they want government to be fiscally responsible, but routinely back even more spending and greater taxes than Republicans.

It’s a one-way street that dead ends in a brick wall. A TEL would prevent the inevitable crash.

-- August 25, 2008