Analysis and talking points
by State Rep. Wayne Christian, Texas District 9
Background: Weaknesses in Texas’ Existing Constitutional Spending Limit
Texas’ economy is one of the strongest in the nation, due in large part to the spending restraint of legislators which helps keep taxes low and the private sector vibrant. Fiscally conservative legislators are assisted by the spending limitation contained in the Texas Constitution. While not perfect, the constitutional limitation does require the Legislature to restrain spending, something which is not true of all states. The constitutional language reads in part:
In no biennium shall the rate of growth of appropriations from state tax revenues not dedicated by this
constitution exceed the estimated rate of growth of the state’s economy… In no case shall appropriations exceed revenues as provided in Article III, Section 49a, of this constitution.
The constitution grants the Legislature authority to provide statutory guidance to facilitate implementation of the spending limitation. Under this guidance, the “rate of growth of the state’s economy” is calculated by the Legislative Budget Board by “dividing the estimated Texas total personal income for the next biennium by the estimated Texas total personal income for the current biennium.”
However, personal income is not a sensible basis for a spending limit: as personal income increases, the “need” for government services and assistance programs should decrease along with the spending on those programs.
This helps explain why state spending in Texas has increased so rapidly especially during periods of strong economic growth – the ineffective state spending limit allowed government programs and services to be expanded while the population was becoming increasingly well-off. Since passage of the current constitutional spending limit thirty years ago, state appropriations have almost doubled on a per-capita basis even when adjusted for inflation.
Inflation-adjusted state spending has increased from around $4,000 per capita in the 1980-81 biennium to more than $7,000 per capita in the current (2010-11) biennium.
In sum, the reason for the growth of the state budget despite a constitutional spending limit is found in specific shortcomings of the language:
1. The definition of the rate of growth is too generous.
Significantly, the growth of personal income (11.34 percent) typically outpaces the growth of inflation and population (4.09 percent).
2. A simple majority may vote to override the limit.
This provision renders the existing spending limit a meaningless “safeguard” against higher spending. By comparison, spending revenue from the Economic Stabilization Fund can require a two-thirds vote in the Legislature, as does passing a constitutional amendment.
3. The existing constitutional spending limitation does not apply to dedicated funds.
The effects of this loophole: first, lawmakers may spend more money than an effective constitutional spending limit would allow; second, spending from dedicated funds to extraneous purposes is encouraged. Dedicated General Revenue accounts for 7.4 percent of all General Revenue funds, so the loophole allows for a significant amount of state revenue ($6.4 billion in the current biennium) to be exempted from the spending limit.
Strengthening the Constitutional Spending Limit
1. The flawed constitutional spending limit should be rewritten to limit growth of the state budget to population growth plus inflation.
In using this measure, the state will be able to continue to provide necessary services to the population as it grows. Any budget growth above this would be constitutionally restricted.
Because of inherent weaknesses in the existing constitutional spending limit, a population growth and inflation-based formula would more-effectively limit state spending growth. Research published recently by the Mercatus Center at George Mason University highlights the effectiveness of using population growth plus inflation as the basis for a constitutional spending limitation. Researchers reviewed the budgets of fourteen states between 1987 and 2009, concluding that “in twelve of the fourteen states, the entire FY2009 budget gap would have been avoided had the state kept inflation-adjusted spending at its 1995 per capita level,” and that “in thirteen of
the fourteen states, the 2009 gap would have been avoided had the state kept inflation-adjusted spending at its 1987 per capita level.”
It is apparent that had a population growth plus inflation limit been in effect, Texas would either be facing a much smaller budget shortfall in the 2012/13 biennium, or perhaps no shortfall at all. This point is underscored by the Mercatus report:
[B]udget shocks can entail less pain if a state has limited its government spending growth over the long run. Many states allowed their spending to grow rapidly, outpacing the economy’s ability to produce wealth, and then had to make painful budget cuts and revenue increases when the recession hit…states whose spending levels grew faster in the decades preceding the recession tended to experience larger budget gaps once the recession hit.
2. A two-thirds vote should be required to override the spending limitation, as opposed to the simple majority that is required under current law.
3. To address the other weaknesses in the state’s existing constitutional spending limit, an improved spending limitation should apply to dedicated state funds as well as non-dedicated General Revenue.
These reforms will help create a more meaningful spending limit that truly restricts spending growth while continuing to meet the needs of Texans and avoiding future budget shortfalls. Legislators should also consider exempting appropriations to the Property Tax Relief Fund from any revised spending limitation, since funds that are returned to taxpayers do not meet any reasonable definition of government spending.
Surplus Revenue
A key consideration when creating a tighter constitutional spending limit is how the new limit would deal with the surplus revenues that would likely be created. The state already has funds into which surplus revenues could be deposited, including the Economic Stabilization (Rainy Day) Fund and the Property Tax Relief Fund. Both of these funds could be allocated surplus revenues accruing as a result of a tighter constitutional spending limit. Supplementing the Property Tax Relief Fund would provide additional relief for taxpayers from one of the most burdensome taxes in the state, while maintaining a healthy balance in the Rainy Day Fund is critical for the state’s fiscal stability and helps retain the state’s strong bond ratings, keeping borrowing costs low.
In addition to these funds, a new fund could be created as part of a new constitutional spending limit to use surplus revenues to offset future shortfalls. Between 1978 and 2009, state tax revenues grew, on average, by 6.9 percent each year. While some years saw extraordinary revenue growth (e.g. 18 percent in 1980, 20 percent in 1988, and three successive years of double-digit revenue growth from 2006 to 2008), the state experienced significant revenue declines in other years (e.g. a 4.6 percent decline in 1986, a 3.5 percent decline in 2002, and an 8.5 percent decline in 2009).
Depositing surplus revenues that exceed average historical revenue growth into a fund that could then be used to offset future budget shortfalls would be fiscally prudent.
Talking Points
1. Texas’ spending growth over the last 30 years illustrates that the current constitutional spending limit is ineffective:
- The spending limit in the Texas Constitution is too generous as evidenced by the per capita growth of the state budget since the limit was enacted.
- Since the 1980/81 biennium, inflation-adjusted per capita state spending has grown from $4,000 to more than $7,000.
-Had a more effective spending limit been in place, Texas would likely not be facing a revenue shortfall in the 2012/13 biennium.
2. A spending limit based on population growth plus inflation would be more effective:
- The current spending limit is based on personal income growth, meaning that as incomes rise, so does government spending.
- This approach is counterintuitive because government spending should not be increasing as incomes rise. Government spending should reflect the need for services, population trends, and the cost of providing necessary services.
- A state spending limit based on population growth and inflation would allow the state to continue to provide services as the population grows, but would require extraneous spending growth to be curtailed.
3. A tighter spending limit would help eliminate state budget shortfalls, deliver additional tax relief, and further improve the state’s fiscal stability:
- Research shows that spending limitations based on population growth plus inflation can typically eliminate or substantially reduce budget shortfalls in the long term. In other words, restraining spending makes it more likely that the state will be able to balance the budget even when revenues decline during an economic downturn.
- Limiting spending growth during periods of revenue growth would allow more funds to be returned to taxpayers (e.g. via the Property Tax Relief Fund), or deposited in the Rainy Day Fund to guard against future budget shortfalls and to protect the state’s bond rating
