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Posts Tagged ‘TABOR’

As explained in this short video, a spending cap limits how fast a government’s budget can grow each year.

That’s a very sensible approach, sort of like having a speed limit in a school zone, and even left-leaning international bureaucracies have concluded it’s the best fiscal rule.

That being said, not all spending caps are created equal. A fiscal rule that allows continuous increases in the burden of government spending is akin to an excessive speed limit on the road in front of an elementary school.

At a minimum, a spending cap should keep the spending burden constant (relative to the economy’s productive sector). Even better, a spending cap should fulfill the Golden Rule of fiscal policy by slowly but surely reducing the size of government.

Let’s learn from a real-world example.

Ben Wilterdink, a Visiting Fellow with the Alaska Policy Forum, explains for readers of the Peninsula Clarion that the state has a spending cap, but one that is set too high.

Alaska is in the midst of a perfect fiscal storm. …Even before the present crisis, our state faced large budget deficits and tough decisions about how to make ends meet. …That’s why adopting a functional limit on the growth in state spending is essential for long-term economic success. …a functional limit in the growth of state spending decreases the temptation to dramatically increase spending when economic times are good, creating new budget expectations that are difficult to maintain during inevitable economic downturns… Technically, Alaska already has a constitutional spending cap in place, but the formula used renders it basically meaningless. …While Alaskans can’t retroactively adopt a meaningful spending limit, we can ensure that those economic benefits are captured going forward.

So why is a spending cap now an important issue?

Because the state relies overwhelmingly on energy taxes, which are very cyclical, and the drop in oil prices is putting pressure on state finances.

This isn’t an overnight phenomenon. Here’s some of what Henry Olsen wrote last year for the Washington Post.

Alaskans have long financed their state government without paying for it themselves. Alaska has no personal income tax and no statewide sales or property tax. Instead, the state uses taxes and royalties on oil and gas producers to fund the overwhelming share of its government. …Alaska Gov. Mike Dunleavy (R) told his constituents that the gravy train is over. Oil prices and production have been down for many years… Dunleavy showed the leadership that many conservatives contend is lacking in Washington and proposed slashing state spending by nearly 25 percent. Those cuts are real, not some phony accounting scheme against “projected” spending. …Dunleavy’s budget is forcing Alaskans to decide how much government they want and how much they are willing to pay for it.

The bad news is that Alaskans may decide they want more government. Indeed, Olsen suggests in his column that this may be the outcome.

That might even lead politicians in the state to do something really unfortunate, such as adopting a state income tax.

The key thing to understand, however, is that the state would not be in this position if it had the kind of meaningful spending cap that Ben Wilterdink discussed in his column.

I wrote about Alaska’s fiscal policy back in 2015 and shared a very depressing chart showing that the burden of state spending tripled in the eight-year period between 2005 and 2013.

Just imagine, though, if spending during that period only grew at the rate of population plus inflation. The state would be in a very strong fiscal position today instead of dealing with a big mess (that’s also the case for the federal government, which also deals with revenue fluctuations).

So what’s the bottom line? Here’s another excerpt from Wilterdink’s column, noting that Colorado’s spending cap is a good role model.

…the most effective is Colorado’s Taxpayer Bill of Rights (TABOR), which constitutionally limits spending growth to the rate of inflation plus estimated population growth. The stable budget and tax climate created by TABOR has served Coloradans remarkably well. Over the past decade, Colorado’s gross state product (GSP) has grown by 45.5%, personal income has grown by 59.5%, and non-farm payroll employment has grown by 15.8%.

Amen. Colorado’s TABOR policy is a common-sense policy with a strong track record. And Colorado voters, most recently last November, routinely reject proposals to bust the state’s spending cap. So it’s an economic success and a political success.

P.S. If Alaska (or any other jurisdiction) wants global examples of successful spending caps, Switzerland and Hong Kong are good role models.

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Time for my annual column highlighting the “Best” and “Worst” policy developments of the year, a tradition I sort of started in 2012 and definitely did in 2013, 2014, 2015, 2016, 2017, and 2018.

I’m trying to be a glass-half-full kind of guy, so we’ll start with the best policy developments for 2019.

Boris Johnson’s landslide victory – I was in London for the recent U.K. election and was pleasantly surprised when Boris Johnson won a surprising landslide. That’s not a policy development, of course, but it’s first on my list because it presumably will lead to a genuine Brexit. And when the United Kingdom escapes the sinking ship of the dirigiste European Union, I have some hopes for pro-market policies.

TABOR wins in Colorado – Without question, the best fiscal system for a jurisdiction is a spending cap that fulfills my Golden Rule. Colorado’s constitution has such a policy, known as TABOR (the Taxpayer Bill of Rights). Pro-spending lobbies put an initiative on the ballot to eviscerate the provision, but voters wisely rejected the measure this past November by a nearly 10-point margin.

Macroeconomic strength – A strong economy also isn’t a policy, but it’s partially the result of good tax reforms and much-needed regulatory easing. This has pushed up the value of stocks (though I worry we may be experiencing a bubble), but I’m much happier that it’s led to a tight labor market and increased wages for lower-skilled workers.

Now let’s look at the worst developments of 2019.

An ever-increasing burden of government spending – The federal government is far too big, and it keeps growing in size. Entitlements are the main problem, but Trump added to the mess by capitulating to another budget deal that increases the burden of discretionary spending.

Missed opportunity on China trade – Because he foolishly focused on the bilateral trade deficit, Trump missed a great opportunity to pressure China to eliminate (or at least reduce) various cronyist policies that actually do distort and undermine trade.

Repeal of the Cadillac tax – I never imagined I would be in a position of stating that it was a mistake to repeal a tax increase, but the recent repeal of the tax on high-end health plans is such bad policy in terms of health care (contributing to third-party payer) that it more than offsets my long-standing desire to deprive Washington of revenue.

I’ll close by noting my most-read and least-read columns of the year.

We’ll start with the popular items.

  1. My most-read column from 2019 discussed a very impressive (and very understandable) example of tax avoidance from France.
  2. In second place was my piece that lauded a columnist for the New York Times who admitted gun control is foolish policy.
  3. Winning the bronze medal was my column from last week celebrating the dissolution of the Soviet Union.

By the way, my most-read article in 2019 was actually a quiz about political philosophy I shared back in 2015. Those must be popular items, because other quizzes (from 2014 and 2013) were actually the third-most and fourth-most popular columns for the year.

And here are the biggest duds.

  1. The column with the least clicks (perhaps because it was only posted a couple of days ago) revolved around the technical issues of economic sanctions, extraterritoriality, and the strength of the dollar.
  2. The second-worst-performing column was from late November and discussed the International Monetary Fund’s cheerleading for higher taxes in Japan.
  3. Next on the list is my discussion from a few days ago about how Washington imposes policies that encourage households to make short-sighted financial choices.

P.S. About 80 percent of readers are from the United States, and that’s been relatively constant over the years. But it’s been interesting (at least to me) to observe where other readers reside. In the very beginning, Canada provided the second-biggest group of readers, but then the United Kingdom took over for several years, only to be dethroned by Australia in 2017 and 2018. For 2019, though, the United Kingdom reclaimed second place, presumably because I kept writing about Brexit. If we go by readers as a share of the population, I’m actually most popular in small tax havens.

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Spending caps are the most effective way of fulfilling my Golden Rule for fiscal policy.

And we have good evidence for this approach, as I explain in this FreedomWorks discussion.

I also discuss tax competition in the interview, as well as other topics. You can watch the entire discussion by clicking here.

But I’m sharing the part about spending caps because it fits perfectly with some new research from Veronique de Rugy and Jack Salmon of the Mercatus Center.

They point out that America faces a grim fiscal future, but suggest that fiscal rules may be part of the solution.

…the federal budget process as it exists today has proven inadequate…it is a great way to enable politicians to do what they want to do (cater to interest groups) while avoiding what they don’t want to do (living within their means). …The negative consequence emerging from this chaos and the resulting failure to follow budget rules is an unremitting expansion of the size and scope of government… With countries around the world experiencing growing debt-to-GDP ratios, resultant stagnation in economic growth, and, in extreme cases, default on debts, academics have been paying an increasing amount of attention to the potential of rules toward restraining unsustainable deficit spending. …The good news is that the evidence suggests that these fiscal rules are broadly effective at restraining deficit spending. …The bad news is that not all fiscal rules are effective in restraining government profligacy and curtailing debt growth.

The authors are right. Some fiscal rules don’t work very well.

As I stated in the interview, balanced budget requirements tend to be ineffective.

Spending caps, by contrast, have a decent track record.

The Mercatus study looks at Hong Kong.

Hong Kong…might actually represent the gold standard of good fiscal policy. …Hong Kong’s Financial Secretary, Mr. John Tsang, explained, “Our commitment to small government demands strong fiscal discipline. . . . It is my responsibility to keep expenditure growth commensurate with growth in our GDP.” …in Hong Kong it’s actually a constitutional requirement: Article 107 requires that the government should strive to achieve a fiscal balance, avoid deficit, and more importantly, make sure government spending doesn’t grow faster than the growth of the economy. …Hong Kong’s spending-to-GDP ratio has fluctuated between 14 and 20 percent since the 1990s, its debt as a share of GDP is zero, social welfare spending remains steady at less than 3 percent of GDP.

Amen.

I’ve also praised Hong Kong’s fiscal policy.

Now let’s look at what the authors wrote about Switzerland.

Swiss politicians are not allowed to increase spending faster than average revenue growth over a multiyear period (as calculated by the Swiss Federal Department of Finance), which confines spending growth to a rate no higher than the rate of inflation plus population growth. The Swiss debt brake rule is significant in that it appeals to economists and policymakers on both sides of the aisle. Advocates for fiscal restraint support this rule because it is effectively a spending cap, while social democrats support the rule as it allows for deficit spending during recessionary periods. …There’s no arguing with the results: Annual spending growth fell from an average of 4.3 percent to 2.5 percent since the rule was implemented. Also, in 10 out of the past 14 years, Switzerland has had budget surpluses, while deficits have remained rare and small… At the same time, the Swiss debt-to-GDP ratio has fallen from almost 60 percent in 2003 to around 42 percent in 2017.

Once again, I say amen.

Switzerland’s spending cap is a big success.

Here’s Figure 1 from the study, which shows a big drop in Swiss government debt. I’ve augmented the chart with OECD data to focus on something even more important – which is that the burden of spending (which started very low by European standards) has declined since the debt brake was implemented.

Last but not least, let’s look at the Danish example.

In 2014 Denmark implemented The Budget Act to ensure more efficient management of public expenditures. The act is aimed at ensuring a balance or surplus on the general government balance sheet, as well as appropriate expenditure management at all levels of government. In practice, the rule sets a limit of 0.5 percent of GDP on the structural budget deficit. Policymakers decided that managing fiscal policy on the basis of a balanced structural budget would lead to an appropriate fiscal position in the long term. They also designed the system to take discretion out of their own hands by making the cuts automatic. In addition to structural deficit rules, the Budget Act introduces four-year rolling expenditure ceilings. These ceilings set legally binding limits for spending at all levels of government and for each program. If one program spends under its cap, any money not spent cannot be reallocated to another program.

I guess this is time for a triple-amen.

Here’s Figure 2 from the study, which I’ve also augmented to highlight the most important success of Denmark’s policy of spending restraint.

The economic case for spending caps is ironclad.

The problem is that it’s an uphill climb from a political perspective.

Politicians prefer legislative spending caps. After all (as we saw in 2013, 2015, 2018, and this year), those can be evaded with a simple majority, so long as there’s a profligate president who approves higher spending levels.

And those caps have never applied to entitlements, which are the part of the budget that eventually will bankrupt the nation.

So why would public choice-motivated lawmakers actually allow a serious and comprehensive spending cap to become part of the Constitution?

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A balanced budget requirement is neither necessary nor sufficient for good fiscal policy.

If you want proof for that assertion, check out states such as IllinoisCalifornia, and New Jersey. They all have provisions to limit red ink, yet there is more spending (and more debt) every year. There are also anti-deficit rules in nations such as GreeceFrance, and Italy, and those countries are not exactly paragons of fiscal discipline.

The real gold standard for good fiscal policy is my Golden Rule. And the best way to make sure government doesn’t grow faster than the private sector is to have a constitutional rule limiting the growth of government.

That’s why I’m a big fan of the “debt brake” in Switzerland’s constitution and Article 107 in Hong Kong’s constitution.

And it’s also why the 49 other states, assuming they want an effective fiscal rule, should look at Colorado’s Taxpayer Bill of Rights (TABOR) as a role model.

Colorado’s Independence Institute has a very informative study on how TABOR works and the degree to which it has been effective. Here’s a good description of the system.

Colorado voters adopted The Taxpayer’s Bill of Rights in 1992. TABOR allows government spending to grow each year at the rate of inflation-plus-population. Government can increase faster whenever voters consent. Likewise, tax rates can be increased whenever voters consent. …The Taxpayer’s Bill of Rights requires that excess government revenues be refunded to taxpayers, unless taxpayers vote to let the government keep the revenue.

And here are the headline results.

Cumulatively, TABOR refunds have been over $800 per Coloradan, or $3,200 for a family of four. …If Colorado government had continued growing at the same high rate (8.56% compound annual rate) as in 1983-92, the average Coloradan would have paid an additional $442 taxes in 2012. The cumulative two-decade savings per Coloradan are $6,173—or more than $24,000 for a family of four.

However, the study notes that TABOR was most effective during its first 10 years. It was less effective in its second decade because voters acquiesced to a “TABOR time-out” as part of referendum C in 2005.

The final decade included the largest tax increase in Colorado history, enacted as Referendum C in 2005. Decade-2 was also marked by increasing efforts to evade TABOR by defining nearly 60% of the state budget as “exempt” from TABOR. …Rapid government growth resumed in Decade-2, mainly because of Referendum C.

This chart from the study shows that outcomes were much better during the first decade of TABOR.

But a weakened TABOR is better than nothing. Here’s the conclusion of the report.

The Taxpayer’s Bill of Rights Amendment has worked well to achieve its stated intention to “slow government growth.” Although government has still continued to grow significantly faster than the rate of population-plus-inflation, the Taxpayer’s Bill of Rights did partially dampen excess government growth. …In terms of economic vitality, Colorado’s Decade-1 was best for Colorado. Unlike in the pre-TABOR decade, or in TABOR Decade-2 with its record increase in taxes and spending, because of Referendum C. Colorado’s first TABOR decade saw the state economy far outperform the national economy.

But keep in mind that the economic gains occurred in the first decade.

The bottom line is that spending caps are like speed limits in school zones. If they’re set too high, that defeats the purpose.

And in Colorado, the vote for Referendum C allowed a spending surge that made a mockery of TABOR.

But only temporarily, which is why that period was known as the “TABOR time-out.” The rules once again limit spending growth to population plus inflation.

For instance, TABOR made it difficult for state politicians to spend the additional tax revenues produced by marijuana legalization.

Needless to say, the political crowd hates having their hands tied. Which is why the pro-spending lobbies are agitating to once again gut TABOR. Here’s a clip from a local news report that does a good job of describing the current fight.

The battle actually started a couple of years ago. Here are some excerpts from a 2016 report by the Associated Press.

By 2030, Colorado’s population will grow from 5 million to 7 million people, thanks in part to a strong and diverse economy, the state’s famed Rocky Mountain quality of life, and its constitutionally-mandated low taxes. …The state’s Democratic governor, John Hickenlooper, is trying to find ways to squeeze more revenue for roads from the budget, while Republicans don’t want to tamper with the fabled 1992 constitutional amendment known as TABOR that keeps a tight limit on those taxes. …Under TABOR, voters must approve any state and local tax hike. Democrats are still stung by a resounding defeat of a 2013 ballot initiative to raise $1 billion for schools.

I’m amused by the fact that the above passage starts by noting the state has a “strong” economy. Too bad the reporter didn’t put 2 and 2 together and recognize that TABOR deserves some of the credit.

Likewise, this next passage cites a leftist who acknowledges growth in the state, but pretends that it’s exogenous, like the weather.

Liberals think that’s a recipe for disaster, especially in a growing state. “What we have to stop doing is pitting necessary priorities like roads against other necessary priorities like schools and colleges,” said Tim Hoover, spokesman for the Colorado Fiscal Institute, which favors dismantling the amendment. “TABOR forces us to do that.” So far the low-tax crowd is winning. Even Hickenlooper acknowledges there isn’t a popular appetite to raise taxes, and his hopes of changing the classification of an arcane fee in the budget to free up revenue are opposed by Republicans… Republicans say the real problem is growing Medicaid spending. Colorado, which expanded the program under the Affordable Care Act, is spending about $2.5 billion on the health care plan.

Note that TABOR critics object to various interest groups having to compete for money.

But that’s exactly why a spending limit is so desirable. Politicians are forced to abide by the rules that apply to every household and business in the state. In other words, they have to (gasp!) prioritize.

Let’s conclude by reviewing some passages from a pro-TABOR column published last week in the Steamboat newspaper.

Colorado’s  has grown by nearly two-thirds since 1992, one of the fastest increases in the country. If you are part of the more than two million new residents who have arrived over this time, there are a few things you should know…the Taxpayer’s Bill of Rights is responsible for much of the state’s economic success, which likely drew you here in the first place. Between 1992 and 2016, median household income in Colorado grew by 30 percent, adjusted for inflation. …TABOR helped end years of economic stagnation and laid the groundwork for the state’s future success by keeping resources in the hands of Colorado residents who could put them to their highest valued use and checking overzealous government spending. …Its requirement that excess revenues must be refunded to taxpayers has also resulted in more than $2 billion being returned to the private economy… TABOR has empowered voters to reject roughly a dozen advocacy-backed tax hike proposals.

My favorite part is when they cite critics, who confirm that TABOR is successful.

Denver Post editorial last year complained, “TABOR’s powerful check on government spending in reality has been a padlock on the purse-strings of the General Assembly.” The check on spending is exactly the point, and it still allows spending to grow in-line with inflation and population growth. If government wants more money, all it has to do is ask. Requiring consent is hardly a “padlock.”

Amen. We could use some more padlocks in the rest of the country. TABOR should be nationally emulated, not locally emasculated.

P.S. Enjoy this amusing video from the Independence Institute. It shows politicians in a group therapy session about TABOR.

P.P.S. By the way, there is a spending cap in Washington, though it only applies to a small portion of the budget (appropriated outlays). Sadly, that very modest example of fiscal restraint has not been very effective. The group therapy session in Washington, otherwise known as Congress, voted to bust those spending caps in 2013, 2015, and earlier this year. Sort of D.C.’s lather-rinse-repeat version of Referendum C.

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Back in March, I shared a remarkable study from the International Monetary Fund which explained that spending caps are the only truly effective way to achieve good fiscal policy.

And earlier this month, I discussed another good IMF study that showed how deficit and debt rules in Europe have been a failure.

In hopes of teaching American lawmakers about this international evidence, the Cato Institute put together a forum on Capitol Hill to highlight the specific reforms that have been successful.

I moderated the panel and began by pointing out that there are many examples of nations that have enjoyed good results thanks to multi-year periods of spending restraint.

I even pointed out that we actually had an unintentional – but very successful – spending freeze in Washington between 2009 and 2014.

But the problem, I suggested, is that it is very difficult to convince politicians to sustain good policy on a long-run basis. The gains of good policy (such as what was achieved in the 1990s) can quickly be erased by a spending binge (such as what happened during the Bush years).

Unless, of course, there’s some sort of constraint on the desire to spend money. And the panelists discussed the three most successful examples of reforms that constrain the growth of government.

We started with a presentation by Daniel Freihofer from the Swiss Embassy. He talked about Switzerland’s “Debt Brake,” which actually is a spending cap.

It’s remarkable how well Switzerland has performed while most other European nations have suffered downward spirals of more spending-more taxes-more debt. Here’s a chart I put together on what’s happened to spending in Switzerland ever since 85 percent of voters imposed the Debt Brake early last decade.

By the way, Herr Freihofer said during the Q&A session that support for the Debt Brake is now probably about 95 percent, so Swiss voters obviously understand that the policy has been very successful.

Our second speaker was Clement Leung, Hong Kong’s Commissioner to the United States. He talked about Article 107 and other rules from Hong Kong’s Basic Law (their constitution) that limit the temptation to over-tax and over-spend.

And if you want to see some of the positive results of these rules in Hong Kong, here’s some of what Commissioner Leung presented.

By the way, the burden of government spending in Hong Kong averages about 18 percent of economic output. That’s the most impressive result. And Commissioner Leung explained that there’s a commitment to keep the burden of spending below 20 percent of GDP.

The final panelist was Jonathan Williams from the American Legislative Exchange Council, and he talked about Colorado’s Taxpayer Bill of Rights, popularly known as TABOR.

Jonathan talked about how the pro-spending lobbies keep attacking TABOR, and he mentioned that they narrowly succeeded in getting a five-year suspension of the law back in 2005. But Colorado voters generally understand they have a good policy.

The most recent attempt to enable more spending came in the form of an increase in the state’s flat tax back in 2013 and voters rejected it by a stunning 66-34 margin (almost as impressive as the recent vote against tax hikes in Michigan) even though Jonathan said advocates outspent opponents by a 289-1 margin.

Here’s a slide from his presentation showing what happened during other attempts to enable more spending.

By the way, Jonathan also mentioned that Colorado’s voters are about to get a TABOR-mandated tax cut because taxes on marijuana are pushing revenues above the limit. Talk about a win-win situation!

To wrap up, one of the big lessons from all the presentations is that governments generally get in trouble because they can’t resist over-spending when the economy is doing well and generating lots of tax revenue.

I fully agree, and I’ve previously explained this is why Alberta got in fiscal trouble, and also why California suffers a boom-bust budgetary cycle.

The way you solve this problem is not with a balanced budget requirement (which often serves as the justification for tax hikes), but some sort of spending limitation rule.

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