WSJ: “How to Control State Spending”

December 13, 2010

An op-ed in Saturday’s The Wall Street Journal questions the merits of a long-celebrated budget control mechanism, and proposes a better toolkit for tightening states’ budgets.

Below is an excerpt, click here to read the full article.

For the past three decades, fiscal conservatives have celebrated the “tax-and-expenditure limitation” as an effective way to limit budget growth…. But recent research suggests that these laws may actually be doing more harm than good.

Consider Florida, which enacted a tax-and-expenditure limitation (TEL) in 1994. In Florida’s case, the TEL specified that the budget could grow no faster than the sum total of residents’ income.

Florida also has a number of other laws that, in theory, should have controlled its budget. Like most states, it has a balanced budget requirement. It also requires a supermajority to raise the corporate income tax.

Despite all of this, Florida’s budget has ballooned. State expenditures grew by 17% between 2005 and 2007. That capped off a 20-year period during which the state’s per capita spending grew 30% faster than per capita income. Economists are forecasting a $3 billion budget gap for fiscal year 2011.

So what can Florida lawmakers, desperate to limit state spending going forward, do?

For one thing, states could get serious about balanced budget rules. While every state but Vermont is technically required to balance its books, most states, including Florida, have relatively weak rules. A number of studies have found that the stricter a state’s balanced budget requirement, the less it spends.

The writer also suggests states could force tighter budgets by requiring a supermajority to increase taxes, and by employing a mechanism similar to the line-item veto that allows governors to “single out a particular item in the budget” to cut.

After adjusting for other factors, Professor Mark Crain of Lafayette College, estimates that (the ‘item-reduction veto’) can limit per capita state spending by as much as 14%.

If the last decade has been a fiscal nightmare, at least it has provided a learning opportunity. Taking stock of all the options available, there is good reason to believe real reform is possible.

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