Budgeting Through the Constitution: Popular Appeal; Practical Problems

From our Nov-Dec 2011 edition of Fiscal Focus. The potential long-term consequences of constitutional budgeting and supermajority requirements make these popular ideas poor policy.

Budgeting Through the Constitution: Popular Appeal; Practical Problems

Unlike many states, Minnesota has largely resisted using the state constitution to usurp the legislative budget-building process. With the exception of our long history of dedicating transportation-related revenues (gas taxes and more recently motor vehicle sales tax receipts), the state constitution remained free from provisions prescribing how much government revenue could be raised or how that revenue must be spent.

That wall crumbled in 2008 with voter passage of the politically popular but fiscally irresponsible constitutional dedication of an additional 3/8th cent sales tax specifically for arts and natural resource related programs. One of the many concerns of its passage was that the experience in direct democracy would open the door for other budget end-arounds. It shouldn’t be surprising that two proposals to inject fiscal constraint into state government through voter approved constitutional amendments will be part of the discussion in the 2012 legislative session.

“Would You Like that Majority Supersized?”

The first proposal, HF 1598, would require a three-fifths supermajority of both legislative bodies to increase the rate or expand the base of state income and sales taxes. The supermajority provision would also extend to the statewide property tax as well as to the granting of any local government authority to impose or increase a property tax rate or levy without voter approval. The proposal does allow for tax policy changes without a supermajority vote but only if “the law also decreases taxes and does not, on a permanent basis, increase the total amount of revenues raised from state taxes and property taxes.” It’s a chapter from the playbook of sixteen other states that have supermajority provisions for tax increases. All but one are enshrined in state constitutions.

Proponents and opponents of supermajority provisions both invoke the preservation and strengthening of democratic government in support of their arguments. Proponents argue supermajorities prompt more responsible tax policy built on broader consensus and help insulate democracies against the “tyranny of the majority” in which the majority of voters force a minority to subsidize their preferred level of spending. Critics counter supermajorities actually weaken democratic systems by diluting the vote of the individual allowing powerful, well-connected minorities to gain power at the expense of the majority. In our review of literature from around the country, it was a bit humorous to see the staunchest proponents and the harshest critics both use the same James Madison quotations to support their positions.

Theory aside, the key issue is the impact supermajority vote requirements actually have on governance, budgeting processes, and tax and spending levels. One almost certain impact is that such requirements make substantive tax reform in response to changing demographic or economic realities much more difficult to implement. Reform often involves multiple adjustments to different tax bases and rates, many of which may increase revenue in some way regardless of whether or not the total reform package is revenue positive. Creating the need for supermajority approvals of these puzzle pieces in both legislative bodies in order to enact reform transforms the merely difficult into the nearly-impossible. Even modest but important changes such as those that ensure continued federal conformity – important because they reduce the time and burden associated with tax compliance – would be more difficult to enact.

The language in the bill intended to accommodate reform under a supermajority regime seems has its own implementation challenges. It is difficult to see how one could define or evaluate the concept of “permanent” revenue neutrality. In short, any supporter of a supermajority amendment should be extremely comfortable with the design and structure of Minnesota’s existing state and local tax system.

All Hat and No Cowboy?

Do supermajority vote requirements impact tax revenue growth and spending? Simple comparisons of state budget histories have generated evidence of slower revenue and spending growth in states with these provisions. However, many other economic, political and demographic factors also influence state tax and spending trends. Studies isolating the influence of supermajority provisions while controlling for all these other factors provides a better understanding of their budgetary impact.

Such studies are far fewer in number but do exist. Perhaps surprisingly they show modest or even no effect. A 2009 study examining the revenue impact of supermajority requirements found no statistically significant impacts on the growth in sales taxes, income taxes, total revenue or total revenue per capita.1 Another study examining 37 years of state spending and revenue growth concluded that supermajority rules “do not appear to affect the amount of revenues that government extract from their citizens,” and states with supermajority rules “do not tax or spend on general projects differently than states without them.”2 However, this report did find that supermajority rules can impact the types of spending. Spending on health and human service programs in supermajority states was 7% lower compared to states without such provisions. The explanation: supermajority constraints are more likely to direct support toward public goods and services spending on which most elected officials can agree –– and restrict spending on redistributive programs as a result.

Why do these findings suggest that supermajority provisions are often more symbolism than substance? Researchers conclude state governments have innate political limits within their institutions, processes, and, above all, re-election cycles that act just as effectively as a brake on raising taxes. Minnesota’s own experiences with tax policy over the last ten years and the changes in power at the Capitol are Exhibit A for this argument. At best supermajorities appear unnecessary. At worst they can severely hamstring the ability of government to modify tax policy in response to demographic conditions, economic realities, and federal changes.

Budgeting by Economic Modeling

Meanwhile in the Senate, the focus is on using the state constitution to restrain spending. SF 1378 proposes a constitutional amendment that limits general fund appropriations to a maximum of 98% of the estimated general fund revenue for that biennial budget period at the time of the February economic forecast. Any excess revenues would accrue to a budget reserve account to fund expenditures “necessary to respond to emergencies involving the health, safety, and welfare of the citizens of Minnesota” which would be subject to a three-fifths supermajority vote. The proposed amendment would automatically cut the state sales tax rate if growth in the budget reserve account would grow to 5% of projected general fund revenues, unless the state adopted some other form of tax relief.

Supporters have argued that such provisions would have allowed Minnesota to avoid the difficult budgetary situation we find ourselves in now. To see how this provision might have affected budget reality, we modeled its effects through the Great Recession to the present using the February 2007 economic forecast as our starting point. Two critical assumptions: adjustments to enacted budgets to eliminate budget deficits would require the new budget to be set at 98% of newly projected revenues; and revenues would remain the same under the spending limitations. Based on the February 2011 economic forecast, this amendment would have limited the maximum allowable budget for the current (FY 2012-13) biennium to $32.66 billion – or $1.68 billion less than the $34.34 billion enacted in the special session. At the same time – as of the November 2011 forecast – the budget reserve would have grown to $1.79 billion over four years or some 5.3% of projected general fund revenues, potentially requiring some form of tax relief as of July 1, 2012.3

Clearly, the primary impact of such an amendment is to mandate an “all cuts” approach to any necessary mid-stream budget repairs. But the apparent simplicity of this idea on paper also masks potential complexity and some long term consequences of putting it into practice:

  • Downward “Ratchet Effect” on the Budget. The continual sweep of unencumbered revenues which can only be appropriated following a three-fifths vote of each legislative body in response to an emergency linked to specific circumstances makes reductions in the state sales tax rate or some other form of tax reductions very likely – even in the most challenging budget circumstances as demonstrated above. Assuming that such reductions are permanent, they would then become a part of future economic forecasts and create a negative feedback loop lowering revenue projections, and in turn permissible general fund appropriations.
  • Growth in Dedicated Spending. Like water following the path of least resistance, legislators will almost assuredly pursue paths to safeguard preferred spending programs from harm. Most likely, legislators would take favored spending programs out of the general fund and support them with fees or other new forms of dedicated revenues.
  • Uncertain Impacts on Redesign and Reform. Theoretically, stiffer competition for more constrained general fund dollars might prompt more energy and investment in government redesign. On the other hand, practical experience has long shown that revenue provided by occasional surpluses is the best grease for lubricating reform. Moreover, any redesign efforts requiring transfers and modifications of duties and responsibilities between state and local governments could be immensely complicated by this type of limitation.
  • More Amendments. Once public familiarity and momentum builds for direct democracy of this nature, it is difficult to put the genie back in the bottle. Colorado, the grandfather of the expenditure limitation movement, is a tutorial on how amendments of this sort beget new amendments. As the various consequences play out – both intended and unintended – cottage industries of aggrieved parties and interests form to take their cases directly to the voters. Over time, the layering of these often contradictory provisions can create an incomprehensible state/local fiscal system severely constraining governments’ flexibility to respond to changing circumstances and conditions.

Constitutional amendments that constrain fiscal-decision making have popular appeal but their philosophical problems and the practical mischief they can introduce into state and local fiscal systems make this poor policy. Whatever form the proposed constitutional amendment eventually takes, it is expected to be part of a larger “Reform 2.0” package intended to make government – in the words of Republican leadership – “more accountable, cost-effective and efficient.” It’s doubtful other elements comprising Reform 2.0 will be any less controversial. But if these other components attempt to meaningfully address cost structures, efficiency, transparency, and productivity in government service delivery, they automatically have more intrinsic merit and potential value than anything that might show up on the ballot next November.

Footnotes
  • 1 Meagan Jordan, “The Revenue Impact of State Legislative Supermajority Voting Requirements,” Midsouth Political Science Review, 2009 Vol 10.
  • 2 John Bradbury and Joseph Johnson, “Do Supermajority Rules Limit or Enhance Majority Tyranny? Evidence from the US States: 1960-1997”.
  • 3 For simplicity we assume none of the outlays between February, 2007 and February 2011 would have been enacted pursuant to the amendment’s “emergency” provision