The Taxpayer Bill of Rights (TABOR):
A Solution to Wisconsin's Fiscal Problems
or a Prescription for Future Fiscal Crises?EXECUTIVE SUMMARY The Wisconsin Legislature is currently considering a proposal for a Taxpayer Bill of Rights (TABOR). This constitutional amendment, if enacted, would tie annual increases in spending by all governmental bodies in Wisconsin to population growth and the rate of inflation or some other specified index. It would also require passage of referenda for any spending increase in excess of the limits, for any tax change that causes net revenue gains, and for most government borrowing.
Supporters of the TABOR amendment argue that an amendment is necessary because:
* Tax burdens in Wisconsin have climbed to excessive rates,
* The over-taxation of businesses is hurting economic development in the state, and
* State and local government spending in Wisconsin has gotten out of hand.
In this paper, I argue that none of the above assertions can be justified by the facts.
There is no evidence to suggest that our system of fiscal decision making is broken, or needs the kind of radical transformation that TABOR would bring.
Consider the following:
* School property tax rates have fallen by nearly 50 percent since 1991.
* The property tax burden (tax relative to median household income) on the median value house has actually fallen since 1994.
* Although it is true that Wisconsin has had a high state and local tax burden relative to other states, the state's burden is due in large part to the fact that Wisconsin has a relatively low level of fees and charges (including tuition). When general revenue from both taxes and fees is considered, Wisconsin ranked 15 th among all states.
* There is ample evidence from numerous studies that taxes are only one of a great many factors that influence business location decisions.
* A well-trained labor force and high-quality public services are of equal or greater importance to businesses.
* Businesses in Wisconsin face a relatively low tax burden. In fact, Wisconsin ranks 49 th in business taxes as a share of state and local taxes, and 35 th in business taxes relative to corporate profits.
* Wisconsin is not a particularly high spending state. In 2002, Wisconsin ranked 19 th in state and local government spending relative to personal income.
Historically, the growth rate of Wisconsin's economy has outpaced the rate of inflation. Thus, ii by linking the growth of per capita or per pupil spending to the rate of inflation, TABOR will result in expenditures on public services becoming over time an increasingly smaller part of the economy.
The cost of providing many public services, but particularly education and health care, tends to rise faster than the rate of inflation. In order to attract teachers, doctors, nurses, and other public employees, governments must pay competitive salaries, and with rising productivity average real (inflation adjusted) wages increase. Faced with costs that rise faster than the rate of inflation, all governments in Wisconsin would be forced to steadily reduce the public services they provide.
To predict the likely impact of a TABOR amendment, I calculated how much governments in Wisconsin would have been able to spend if TABOR had been implemented in 1986. The version of a TABOR amendment used in my simulations assume growth in state per capita spending is limited to the rate of inflation, the growth of school district per pupil spending to the rate of inflation plus one percent, and the rate of municipal and county government spending to inflation plus the percentage increase in property values due to new construction.
The results of the simulations indicate that:
* In 2003, state government spending would have been two-thirds of actual state spending. Given that many parts of the budget are impossible or very difficult to reduce, e.g. pension contribution, debt service, corrections, TABOR would likely result in drastic reductions in funding for the University of Wisconsin System, likely elimination of the state's Shared Revenue program, which provides grants to municipal and county governments, and reductions in state government support of K-12 education.
* If TABOR had been in place since 1986, by 2003 public school spending in Wisconsin would have been 20 percent lower than the current level of spending.
* By 2003 TABOR-limited spending of municipal and county governments would have been only 7 percent below actual spending, reflecting in part the fact that local government and county spending, on average, grew much more slowly than spending on public education.
TABOR, however, would have a particularly restrictive impact on municipalities which experienced little economic growth. Supporters of TABOR argue that if voters want to spend more than the TABOR limits they can authorize extra spending through referenda.
Budgetary decisions, however, are complex, and it is unlike that most voters would have the time or expertise to study the issues closely. It is more likely that many voters will be influenced by "bumper sticker" campaigns financed by various groups that want to influence their vote. Low voter turnout, especially in local elections, increases the chance that fiscal decisions in Wisconsin will represent the views of a relative small portion of the electorate.
Opposition to TABOR does not imply that Wisconsin does not face serious fiscal challenges. There are, however, much more effective policies to address these problems than the adoption of a TABOR amendment.
* Problem 1: The tendency of the legislature to make spending commitments, but fail to identify funding sources. Policy response: Follow the lead of the U.S. Congress and enact "pay as you go" budgetary rules.
* Problem 2: The failure to be prepared for the fiscal consequences of economic downturns. Policy response: Follow the example of most other states, and make a commitment to place money in a rainy day fund during periods of economic prosperity.
* Problem 3: Many Wisconsin residents continue to face high property tax burdens. Policy response: By cutting property tax rates, TABOR provides completely untargeted property tax relief.
The legislature should address the problem of high property tax burdens by designing tightly targeted property tax relief to those most in need. There is little doubt that over time TABOR would result in big reductions in programs that help the state's most vulnerable citizens, result in serious downsizing of the University of Wisconsin System, seriously reduce the ability of the public schools to provide a quality education for our children, and risk substantial damage to our environment. And there is little question that these reductions in government services would in the long run do serious harm to the state's economy and jeopardize the future prosperity of its citizens.
- Andrew Reschovsky