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Rigid Limits on State Taxes and Spending Damage Families and Communities

The health and economic crisis due to COVID-19 calls for states to raise revenues and invest in communities, not set harmful, arbitrary limits on doing so, as some state lawmakers have proposed. The pandemic and resulting economic downturn have caused widespread hardship and hit state budgets hard. And while the American Rescue Plan provides significant help, states need to proactively respond to short- and long-term pressures by raising the resources needed to limit economic hardship for those most affected by the pandemic and advance equity-oriented, antiracist policies and public investments.

Limits on revenue raising and spending harm public services and many communities, especially Black and Indigenous communities and communities of color, and can put a state’s recovery at risk. That’s because:

  1. They force cuts over time to things that people need, like health care, infrastructure, and education. Colorado’s experience with its “Taxpayer Bill of Rights” (TABOR), a particularly harsh tax and spending limit, explains why. Even as the state’s population has grown, TABOR’s rigid spending limits and voter requirement to raise taxes have kept it from making needed investments that ensure broadly shared prosperity. Colorado ranks 44th among states for school funding as a share of the state’s economy. And the Colorado Department of Transportation’s ten-year, $5 billion plan has less than half the resources needed to complete it. Proposals in North Carolina and Pennsylvania that would limit spending growth to no more than the percentage growth in population plus inflation would force sharp cuts in support for public services over time, as TABOR has in Colorado.
  2. They would hinder state responses to the current and future crises. Relying too much on budget cuts during an economic downturn can not only harm people already being hit hardest, but can also deepen and prolong the recession itself. (All states generally must balance their budgets each year, even in downturns.) Tax limits, supermajority requirements to increase taxes, and spending limits take away state policymakers’ flexibility and make them likelier to rely on cuts. Colorado, in large part due to TABOR’s restrictions, was the only state without an official rainy day fund prior to the COVID-19 pandemic, leaving it especially vulnerable to the current and future downturns.
  3. They contribute to racial injustice in state tax codes and spending. The oldest tax and spending limits still in law today originated as efforts to disenfranchise people of color, and all contribute to worsening racial inequities. Alabama adopted its constitutional property tax limits, among the oldest still on the books, during state conventions in 1875 and 1901 that were convened with the explicit intention of reestablishing white dominance following Reconstruction, as we describe. And in 1890 Mississippi adopted the nation’s oldest supermajority requirement to raise taxes, at the same constitutional convention at which they disenfranchised nearly all of the state’s Black voters. Wealthy white households in the state supported both efforts, and did not want their taxes to be increased to pay for basic infrastructure, such as schools, for Black residents.

Proposals introduced this year, including property tax limits in Indiana and Wyoming and a two-thirds supermajority requirement to increase taxes in New York, may appear to be racially neutral but would similarly put limits on making public investments that would help address long-standing racial inequities.

Most state tax systems already deepen racial and ethnic inequities because they ask the most, as a share of income, of lower-income households, which are disproportionately households of color due to historical and ongoing discrimination and bias. And tax and spending limits make it hard to change state tax codes so that they’re more racially equitable and to invest in communities of color that states have historically neglected.

  1. They can lead states to depend more on fines and fees. Limits on states’ ability to raise revenue and make public investments in things like education and infrastructure don’t make those needs any less pressing. Instead, in addition to cutting services, they encourage states to raise revenues through public service charges as well as fees and fines. Such charges ask more for public services of those who earn the least, as a share of income, and criminal legal fines and fees disproportionately harm low-income people and people of color. In Colorado lawmakers have found that raising fees, which doesn’t require voter approval, is the easiest path to circumventing TABOR. Colorado is the ninth-most-dependent state on service charges. Because these charges generally aren’t based on a person’s ability to pay, they force struggling Coloradans to bear a greater load for government services that everyone depends on, and similar proposals in other states could cause the same problems. For example, a proposal from one Montana lawmaker to limit the types of taxes the state can levy doesn’t limit fines and fees.

Tax and spending limits aren’t the answer to states’ fiscal challenges. The American Rescue Plan will help a great deal, but states will need to supplement that emergency federal aid and lay the groundwork for a more equitable future by adopting forward-looking, antiracist policies. These options include raising taxes on high incomes and on various forms of wealth, rolling back ineffective corporate tax breaks, and giving localities more flexibility to raise revenue. Tax and spending limits will harm states both now and throughout the recovery.