Most states have laws limiting spending growth — or, less often, tax revenue — according to formulas based on factors like growth in personal income, population, or inflation. But voters and policymakers are coming to recognize the problems with these caps. Attempts to impose caps have failed in recent years in Florida, Maine, New Hampshire, and Washington, and a legislative commission in Connecticut is exploring changes in that state’s cap. In testimony for that commission, I explained why these caps aren’t effective ways to cut spending or boost economic growth and can have damaging, unintended consequences:
They can squeeze budgets when investment is most needed. After a recession, states need to invest to expand the economy and help vulnerable families get back on their feet. But they can’t do that if — as in many states — their allowable budget growth is tied to the prior year’s spending or revenue, when it was depressed due to the recession. As a result, even when the immediate fiscal crisis that an economic downturn caused passes, the state can’t fully restore services to pre-recession levels.
For example, Connecticut’s cap limits spending growth to the average increase in personal income over the past five years. For fiscal year 2015, that five-year period was 2009-2013, which included years when the state’s economy — and therefore personal income — was hit hard by the Great Recession. As a result, allowable growth for 2015 was only 1.7 percent. This would have greatly hampered the state’s ability to recover from the recession. In the end, policymakers moved the federal share of Medicaid spending outside the budget, which allowed added growth.
They make government less efficient. For example, states may shift responsibilities to local governments to stay within the cap, even when the state is the most efficient service provider. These shifts also make public programs more reliant on property taxes and other local revenues, which may raise costs for residents least able to pay.
They make government less accountable. Spending limits give states an incentive to use tax credits and exemptions, rather than spending programs, to accomplish policy goals. That reduces transparency because lawmakers don’t review tax breaks each year, as they do spending programs.
Serious studies find little evidence that tax and spending limits have much of an impact on the growth of state government or a state’s economic performance.
States have much more effective ways to improve the budget process. The CBPP report “Budgeting for the Future” outlines ten tools to help states take a more rigorous approach to long-term budget planning. They include multi-year projections of revenues and spending under current policies, mechanisms to create consensus among governors and lawmakers on a revenue forecast, and “rainy day” reserve funds for times when revenues drop or spending rises unexpectedly.
No formula can take the place of informed deliberation by policymakers who can adapt to evolving conditions and shifting public demands. Rather than relying on inflexible and unproven limits, states should look carefully at their budget processes to see which forward-looking budget tools they lack and adopt them.