April 10, 1997

 

DO STATES WITH SUPERMAJORITIES HAVE SMALLER TAX INCREASES
OR FASTER ECONOMIC GROWTH THAN OTHER STATES?

by Iris J. Lav and Nicholas Johnson

 

The Heritage Foundation contends that states in which a supermajority vote of the legislature is required to raise taxes have experienced faster economic growth and fewer tax increases than other states. A March 1996 Heritage report looks at the seven states that have had supermajority requirements in place for a number of years — Arkansas, California, Delaware, Florida, Louisiana, Mississippi, and South Dakota — and finds that five of the seven states experienced slower than average growth in tax revenue. It also finds that five of the seven states (but not the same five states) experienced faster economic growth than the average state. The Heritage report suggests a causal link between supermajority limits, lower taxes, and faster economic growth, saying "...there is no escaping the logical relationship between supermajorities and superior state performance."1

This simplistic analysis is flawed in a number of ways. It relies on only one among a number of possible measures of economic growth. It considers only state-level tax changes rather than changes in total state and local revenues, despite the capacity of states to shift costs and responsibilities to local governments. And it compares 1980, a year in which the economy was turning down into a mild recession, with 1992, a year at the beginning of an economic recovery. If one chooses more appropriate data series to measure revenues and economic growth and adjusts the time periods to represent similar points in the business cycle, conclusions opposite to those Heritage has presented may be drawn. The fact that different analytical choices lead to different results should serve as a caution that no supportable conclusions can be drawn from the type of simplistic analysis Heritage has conducted.

By some measures, supermajority states have had lower economic growth and more tax increases than other states. For example:

The factors affecting state economic growth are far more complex than proponents of supermajority requirements typically acknowledge. Such factors include the interplay of state resource endowments, labor force skills, location, and level of public investment and state services, among others. A far more sophisticated analysis would be required to discern any effect supermajority requirements might or might not have on state tax burdens or state economies.

 

Heritage's Choices of Data May Skew Results

In preparing its report, the Heritage Foundation made choices that may have skewed the results of its analysis. The questionable choices include the time periods analyzed, the measure of state economic growth, and the measure of tax burden.

The Heritage report compares state economic growth and changes in taxes from 1980 to 1992, which are years that represent two different points in the "business cycle." In 1980, the economy turned down from the peak of an economic expansion into a mild recession; in 1992 the economy was beginning its upswing from the deep 1990-91 recession. State tax policy and state economic growth each are very sensitive to the business cycle, and different state economies react differently to economic downturns and upswings. An accurate picture of state changes requires comparing two years at similar points in the business cycle.

Heritage chose Gross State Product (GSP) as its measure of state economic growth; GSP measures the total output of all industries within a state. A different measure, personal income, is more often used to gauge state economic activity. Personal income measures the total income of state residents, including income from out-of-state sources. Personal income per capita measures the economic well-being of an average resident, which may best reflect the goal of state economic policy.

Similarly, Heritage chose to consider only taxes levied at the state level. Yet when state taxes are constrained, state legislatures may meet their responsibilities for providing services by shifting new responsibilities to local governments or by cutting local aid. Either course of action can lead local governments to raise their taxes. Because of these potential shifts, a measure that includes both state and local taxes should be considered.

An additional shortcoming of the state tax series Heritage uses is that it excludes many tax-like "fees." A more comprehensive measure, state and local revenues, includes revenue sources such as fees and lottery proceeds that may be substituted for revenues from taxes.

Lastly, the Heritage study measures tax burden by calculating the amount of tax revenue per resident. Many analysts find it more appropriate to measure taxes as a percentage of residents' incomes. Because differing wage levels in different states affect both residents' incomes and the cost of providing government services, measuring taxes as a percentage of income provides a more meaningful comparison of tax levels and changes in tax burden over time.

 

Alternative Time Periods and Measurements Yield Results Different from the Heritage Results

Results quite different from those presented in the Heritage report may be obtained by an analysis that matches up similar points in the business cycle and considers a variety of measurements of economic activity and revenues. Depending on the choice of time frame and methodology, such comparisons may actually show that supermajority requirements are associated with increased taxes and slower economic growth.

Table 1 compares the economic growth of the seven supermajority states relative to average growth in all states. Three different measures of growth and two different recent time periods beginning and ending at similar points in the business cycle are considered. Taken together, these measures show no clear connection between supermajority requirements and economic growth. (See appendix tables for detailed comparisons.)

 

Table 1
Portion of Supermajority States with
Stronger-than-average Economic Growth

 

1979 to 1989

1984 to 1993

Gross State Product

3 of 7

not available

Personal Income

3 of 7

4 of 7

Personal Income Per Capita

2 of 7

4 of 7

Source: Center on Budget and Policy Priorities. Based on data from Bureau of Economic Analysis, with population adjustments from the Bureau of the Census.

 

Similar results may be found with respect to levels of revenue increases. Table 2 shows revenue increases in the supermajority states using broader measures of state and local taxes and revenues over the two time periods. The picture that emerges is decidedly mixed.

Table 2
Portion of Supermajority States with Tax Increases
Lower than the National Average

 

1979 to 1989

1984 to 1993

 

State and local taxes

State and local own-source revenue

State and local taxes

State and local own-source revenue

Taxes per capita

5 of 7

5 of 7

2 of 7

5 of 7

Taxes as a percent of income

4 of 7

1 of 7

3 of 7

4 of 7

Source: Center on Budget and Policy Priorities. Based on data from Bureau of the Census, with income adjustments from the Bureau of Economic Analysis.

 

Trends Do Not Prove Causation

Even if tables 1 and 2 presented clearer trends among the seven supermajority states, it would be not be correct to conclude that supermajority requirements were a factor in the economic growth or in the tax decisions in those states. Other factors, such as regional economic variations or changes in political power, are much more likely to affect state economic performance and government finances. A far more sophisticated analysis than either the Heritage study or the analysis presented above would be required to conclude that supermajority requirements have had any substantial effect either on state tax burdens or on state economies.

End Notes

1. Daniel J. Mitchell, "Why a Supermajority Would Protect Taxpayers," The Heritage Foundation, March 29, 1996.


Appendix

Table A-1
Economic growth in states that required supermajorities to raise taxes.

 

Change in Gross State Product

Change in Personal Income

Change in Personal Income Per Capita

 

1979 to 1989

1979 to 1989

1984 to 1993

1979 to 1989

1984 to 1993

Arkansas

96%

99%

72%

92%

64%

California

143%

142%

79%

93%

49%

Delaware

165%

128%

87%

106%

64%

Florida

175%

184%

96%

112%

58%

Louisiana

63%

86%

45%

81%

48%

Mississippi

82%

100%

69%

94%

65%

South Dakota

77%

83%

80%

81%

75%

U.S. Average

112%

121%

76%

101%

61%

Number of supermajority states with economic growth above average

3

3

4

2

4

See notes at end of appendix.

 

Table A-2
Changes in state and local government taxes and revenue
per capita
in states that required supermajorities to raise taxes.

 

1979 to 1989

1984 to 1993

 

State and Local Taxes

State and Local Own-Source Revenue

State and Local Taxes

State and Local Own-Source Revenue

Arkansas

114%

122%

81%

79%

California

101%

123%

62%

70%

Delaware

103%

140%

66%

68%

Florida

126%

155%

91%

97%

Louisiana

87%

119%

49%

56%

Mississippi

96%

117%

75%

73%

South Dakota

83%

97%

68%

46%

U.S. Average

108%

124%

65%

73%

Number of supermajority states with tax or revenue growth below average

5

5

2

5

See notes at end of appendix.

 

Table A-3
Changes in state and local taxes
as percent of personal income
in states that required supermajorities to raise taxes.

 

1979 to 1989

1984 to 1993

 

State and Local Taxes

State and Local Own-Source Revenue

State and Local Taxes

State and Local Own-Source Revenue

Arkansas

11%

15%

10%

9%

California

4%

16%

9%

14%

Delaware

-1%

17%

2%

2%

Florida

7%

20%

21%

24%

Louisiana

3%

21%

0%

5%

Mississippi

1%

12%

6%

5%

South Dakota

2%

9%

-4%

-17%

U.S. Average

3%

11%

3%

8%

Number of supermajority states with tax or revenue growth below average

4

1

3

4

See notes at end of appendix.

 

Notes: Gross State Product not available for years after 1992.
In cases where the state average equalled the national average, the change was computed to additional decimal places to find the correct comparison.
U.S. average excludes Alaska and the District of Columbia, whose revenue systems are significantly different from those of other states.
All data are for fiscal years except Gross State Product.
Sources: U.S. Bureau of Economic Analysis, U.S. Census Bureau.
Center on Budget and Policy Priorities.