Sections: Policy

Very Powerful Real-World Evidence For Spending Caps

US national debt piles up next to the Capitol Building in Washington, D.C., where no one has the political courage to rise to the challenge of staving off the coming crisis.

A few days ago, I cited some research by an economics professor at the University of Georgia (Go Dawgs!), who calculated that we would have a big budget surplus today if Washington lawmakers had simply maintained Bill Clinton’s final budget, adjusting it only for inflation plus population growth.

My purpose was to show that some sort of long-run spending cap (such as limiting outlays so they can’t grow faster than population plus inflation) is the best way of achieving good fiscal outcomes.

And I cited similar hypothetical examples when writing about fiscal policy in Canada and also when sharing some good analysis from Investor’s Business Daily.

I think these examples are persuasive, but some people aren’t overly impressed by arguments that aren’t based on real-world evidence. So I also make sure to show how good things happen in those rare instances that politicians can be convinced to restrain spending.

A review of data for 16 nations reveals that multi-year periods of spending restraint lead to lower fiscal burdens and less red ink.

Between 2009 and 2014, a de facto spending freeze at the federal level dramatically reduced burden of spending in the United States.

Thanks to a constitutional spending cap, Switzerland has shrunk the public sector, balanced its budget and reduced government debt.

Now we have another real-world example to add to our list.

Check out these excerpts from a New York Times story.

A year after Colorado became the first state to allow recreational marijuana sales, millions of tax dollars are rolling in… But a legal snarl may force the state to hand that money back to marijuana consumers, growers and the public — and lawmakers do not want to.

Hmmm…I can understand lawmakers wanting to hold on to other people’s money, but what is meant by “legal snarl”?

Well, it turns out that this is just a way of describing Colorado’s Taxpayer Bill of Rights (TABOR), which imposes caps on how fast the state’s fiscal burden can increase. The reporter from the New York Times writes that this is a “problem,” but taxpayers obviously have a different perspective.

The problem is a strict anti-spending provision in the state Constitution… Technical tripwires in that voter-approved provision, known as the Taxpayer’s Bill of Rights, may require Colorado to refund nearly $60 million…because it collected more than it had anticipated in taxes last year across the board — including construction, oil and gas and other sections of the state’s booming economy. …The complex measure, first approved by voters in 1992, essentially requires that when Colorado collects more money than it had anticipated, it has to give some back to taxpayers.

In other words, the state is collecting plenty of money in taxes, but the politicians are irked they can’t raise spending beyond what’s allowed by TABOR.

And that irks the pro-spending crowd.

Blame lies with the Taxpayer’s Bill of Rights, said Tim Hoover, a spokesman for the Colorado Fiscal Institute, which tracks budget issues in the state. …“It has its own malevolent programming that is really hard to override,” he said.

I obviously don’t agree with Mr. Hoover’s philosophy, but his quote is very powerful evidence that a well-designed spending cap can be effective.

Which is why I cited Colorado’s TABOR back in 2013 as being the best role model in the United States for those who want to genuinely constrain government.

Heck, even the International Monetary Fund now acknowledges that spending caps are the only effective fiscal policy.

By the way, there’s also a Laffer Curve lesson in this story. Echoing what I wrote earlier this year, marijuana tax revenues have been below estimates because the tax rate is too high.

“It’s not that the pot tax came in too high,” said State Senator Pat Steadman, a Democrat who has been trying to write a law that would provide a solution. “It’s that every other revenue came in high.” …Miguel Lopez, who organizes Denver’s annual 4/20 rally — intended to be a giant feel-good festival — said he was sick of what he called high taxes on recreational marijuana. He said they were hurting small stores and helping to keep the black market alive.

Not that we should be surprised. Politicians routinely over-tax tobacco.

And other so-called sin taxes also get set too high, which is a point I made when commenting about a proposed tax on strip clubs in Florida.

“You get a bigger underground economy with high tax rates, which means less revenue than anticipated, and also openings for organized crime and other bad guys,” he said. “Regarding the proposal, I have to imagine that a $25 cover charge, combined with record-keeping, will kill off most strip clubs, so I don’t think they’ll get much money,” Mitchell said. “Customers, presumably, will gravitate to substitute forms of entertainment.”

In the case of Colorado’s pot tax, the “substitute form of entertainment” is simply buying pot in the underground economy.

So the moral of the story, whether looking at spending caps or tax rates, is that politicians are too greedy for their own good.

P.S. What’s the opposite of a spending cap? There are probably a couple of possible answers, but I would pick Obama’s proposed tax-increase “trigger.” Here’s some of what I wrote about that scheme.

Called a “debt failsafe trigger,” Obama’s scheme would automatically raise taxes if politicians spend too much. …Let’s ponder what this means. If politicians in Washington spend too much and cause more red ink, which happens on a routine basis, Obama wants a provision that automatically would raise taxes on the American people.

Fortunately, this was such an awful idea that even gullible GOPers said no. Now if we can keep Republicans from getting seduced into counterproductive tax-hike budget deals, we may actually make some progress!

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Daniel Mitchell

Daniel J. Mitchell is a Senior Fellow at the Cato Institute, and a top expert on tax reform and supply-side tax policy. Mitchell’s articles can be found in such publications as the Wall Street Journal, the New York Times, Investor’s Business Daily, and the Washington Times. He is the author of "The Flat Tax: Freedom, Fairness, Jobs, and Growth," and co-author of "Global Tax Revolution: The Rise of Tax Competition and the Battle to Defend It."

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Tim Hoover says:

April 5, 2015 at 2:07 PM

Hey, Daniel, your understanding of the problem in Colorado is not accurate. The marijuana refunds are NOT being caused by the regular revenue cap in TABOR. Quite the contrary. As you have noted, marijuana collections were actually BELOW projections. So why is the state being put in the position of refunding the money? It is, in fact, because of a "legal snarl" in TABOR.

Let me explain. When a tax increase goes before voters, as Proposition AA did in 2013 to approve special sales and excise taxes on recreational marijuana, TABOR requires the state to do two things when it sends a out a voter guide prior to the election: 1. Estimate how much the new taxes will bring in and, 2. Estimate how much TOTAL revenue the state would have (from sales, income, other taxes) WITHOUT the new tax. If the state is wrong on EITHER of those estimates, if the collections come in higher, it must refund ALL of the new taxes collected for the first year.

Again, this is separate from the regular revenue cap under TABOR. Yes, in the case of marijuana taxes, revenues from sales and excise actually came in significantly LOWER than expected. But on the second estimate, the total revenue the state would have from all other taxes without the new revenue, state economists' estimate was just slightly off - by 1.8 percent. The economy grew just a little faster than they predicted a year earlier.

Once again, this is completely separate from the regular revenue cap in TABOR. This is why I compared TABOR to the HAL 9000 computer. Even though voters said TWICE earlier (once through Amendment 64 wherein they legalized recreational marijuana and approved taxaton, and again through Proposition AA where they set specific rates for excise and sales taxes) that they wanted to tax marijuana and send the lion's share of those taxes to fix schools, TABOR overrode their wishes. This is also why EVEN MANY REPUBLICANS are considering supporting a referred measure that would ask voters, for what would be the THIRD TIME, if they really meant it when they said they wanted those revenues to go to schools.

I don't mind if you say that you disagree with me, but I think you should at least be clear on what it is you are disagreeing with.

If you need any more information on this topic, including credible documentation backing up everything I just said about the refunds, please email me at hoover@coloradofiscal.org