We, the undersigned economists,* write in support of sensible limits on the growth of government at the state and local level. Although there has been much debate on such efforts in the political sphere, a large body of academic research clearly shows that lower tax rates and modest growth in government spending help to promote greater economic expansion and job creation. Any state seeking long-term prosperity for its citizens should enact laws that will prevent the public sector from growing at a rate faster than the private sector can afford. An excellent and proven limit would consist of annual increases in inflation plus population, with overrides upon consent of the voters.
During good times as well as bad, many states increased government spending with reckless abandon. To pay for the irresponsible legacy they created, elected officials in these states have recently resorted to one-time influxes from the federal government’s stimulus package and/or draconian tax increases. Even prior to the current economic slump, however, states have often trapped themselves in perpetually unstable budgetary patterns. Government consumes too much of the economy, in turn leading to less private-sector productivity, lower revenues, and bigger deficits – finally coming full circle to additional tax increases. Well-drafted tax and expenditure limitations restore predictability to fiscal policy, benefiting both public officials and citizens.
There is perhaps no better example of this pattern than the state of California. Between 2003 and 2007, the state’s budget increased by 31 percent. Meanwhile, inflation during that period was only 12 percent and population growth was just 5 percent.[1] The legislature has had to convene two frantic sessions in the last eight months alone to close first a $42 billion budget deficit and later a $26 billion hole created by this spending binge. The budget deals raised California’s already high income and sales taxes and resorted to several accounting gimmicks to bridge the gap. These moves are likely to worsen the economic climate in a state that already has the 6th-highest state and local tax burdens and the 3rd-worst business tax climate in the U.S., according to the Tax Foundation.[2]
Political considerations aside, rules still do matter in taxing and spending policy. Prudent limits, which allow governments to grow only by inflation and population unless voters say otherwise, are workable and flexible tools that prevent fiscal instability and promote economic health.
Sincerely,
The Undersigned