Reprint of article
10/2/2005
E. Frank Stephenson
Twenty-seven states have some form of tax and expenditure limitation. But Georgia, with no structural impediments to governmental growth, must rely solely on elected officials to limit government spending.
Yet special interests seeking government favors and politicians trying to charm voters lead many people to doubt that elected officials provide an effective buffer against expanding government.
Georgia residents' tax burden was 8.7 percent of their income in 1970, but it crept up to 10.2 percent by 1989. The state and local tax burden remained more than 10 percent throughout the 1990s until a modest retrenchment in government spending following the recession of 2001 reduced Georgians' tax burden to 9.8 percent of their income.
Even with the reduced spending after 2001, however, the burden increased 1.1 percentage points from 1970 to 2005, the 13th-largest increase in the nation. By comparison, nearly half (21) of the states decreased their tax burdens during that period.
In 1970, Georgia had the 41st-highest tax burden, making it one of the lowest-taxed states in the nation. Between 1970 and 1990, however, Georgia catapulted up to the 17th-highest tax burden. Georgia's ranking improved a bit during the 1990-2005 period as robust economic growth reduced Georgians' tax burden to the 31st-highest among the 50 states.
This state's mediocre record in controlling the growth in government spending and maintaining a low tax burden on its residents suggests that structural reform, in the form of a tax-and-expenditure limit , might be a useful constraint on politicians.
The roughly $1 billion expansion of government spending in the 2005 legislative session shows the democratic process (e.g., fear of reprisals from voters) is an inadequate restraint on politicians.
A tax-and-expenditure limit needs to be enshrined in a state's constitution; statutory limits can be changed at the whim of a legislature. Exceeding the spending limit should require either a supermajority vote or a referendum.
While governments should have the ability in extenuating circumstances to exceed the spending limit, a simple majority vote provides no restraint above and beyond the current reliance on politicians' self-restraint.
The TEL must be defined to include most, if not all, categories of government expenditure, and should include both state and local government spending. Just five states have more decentralized government spending than Georgia, where state government accounts for 51.3 percent of combined state-local spending.
A TEL focusing only on state spending leaves taxpayers exposed to large increases in spending at the local level. Moreover, limiting just state spending is an invitation for state government to impose unfunded mandates on local governments.
Additionally, the TEL should be limited to inflation plus population growth. That produces smaller government spending in the long run because the TEL will not adjust upward with economic growth.
Finally, a TEL needs explicit rules for handling excess tax revenue, because tax revenue often grows faster than inflation plus population growth during robust economic times. Georgia should place such funds into its rainy- day fund up to a preset target for adequate funding; then the excess revenue should be refunded to taxpayers.
Besides constraining the growth of government spending in Georgia, a TEL that is linked to Georgia's budget stabilization (aka "rainy day") fund should provide greater stability in government spending. By avoiding a rapid increase in government spending in years when a robust economy generates increasing tax revenue and by diverting some of the revenue to a rainy-day fund, the state is able to offset reduced tax revenues.
Relying on the self-restraint of politicians and special interests is not working well for Georgia's citizens who prefer small government and individual liberty.
> E. Frank Stephenson wrote this commentary for the Georgia Public Policy Foundation.
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