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Research & Commentary: Constitutional Limits on Spending Would Be a Positive Step for Iowa

March 28, 2017

In this Research & Commentary, Matthew Glans examines a proposed constitutional amendment that would place stringent spending limits on Iowa legislators.

States across the country continue to struggle with balancing their budgets as a result of increasing spending and a lagging economy. Many states also have accumulated massive amounts of debt that taxpayers will have to pay due to years of overspending combined with state employee pensions and benefits. Higher tax rates then burden families, weaken businesses, and act as a further drag on the economy, creating a cycle of tax hikes and revenue shortages.

In Iowa, state legislators are now considering a proposed amendment to the Iowa Constitution that would add permanent limits on state spending. Under the current laws limiting government spending, which were enacted in 1992, the Iowa Legislature is required to abide by a 99 percent spending limitation, but the law has loopholes that give lawmakers the ability to change the requirement and spend more than 99 percent. Tax and expenditure limitations (TELs), pension reforms, privatization, and other cost-cutting measures are increasingly being considered by lawmakers trying to fix their short- and long-term budget problems instead of raising taxes.

According to The Des Moines Register, the new resolution would set the state’s spending limitation at “the lesser of 99 percent of the adjusted revenue estimate for the state’s general fund for the following fiscal year or 104 percent of the net revenue estimate for the current fiscal year.” Both the governor and legislature would be required to use the limitation in their budgeting processes.

Certain funds would not be included in the spending limitation calculation, including federal funds, constitutionally dedicated funds, and funds from the state’s retirement system. The proposal also includes processes for calculating the new limit when new taxes are implemented or a tax rate is cut.

The Iowa Constitution requires all changes to be approved by simple majorities in the House and Senate in two consecutive General Assemblies and then be approved by simple majority of Iowa’s voters. The Iowa Senate has already adopted the resolution on a bipartisan 38–10 vote. The earliest it could be on a ballot would be the November 2020 election.

In a press release, State Sen. Jack Whitver (R-Ankeny), the current president of the Iowa Senate, argues the new spending limit plugs the holes in the current law while preventing a budget surplus from being calculated in the expenditure limit. Whitver says the amendment would shore up the state’s long-term fiscal future.

Tax and expenditure limitations, such as the proposed constitutional spending limit, effectively keep more money in the pockets of families and job creators. The best TELs are those that are passed as constitutional amendments because statutory limitations are often evaded, Iowa’s proposal fits this model. A strong spending limit would force the government to more closely monitor and limit state spending, thereby properly balancing the budget while limiting the need for future tax hikes.

The following documents examine tax and expenditure limits in greater detail.

 

State Budget Reform Toolkit
https://www.heartland.org/publications-resources/publications/state-budget-reform-toolkit
The American Legislative Exchange Council outlines a set of budget and procurement best practices to guide state policymakers as they work to solve the budget shortfalls. The toolkit will assist legislators in prioritizing and more efficiently delivering core government services by advancing free markets, limiting government, and promoting federalism and individual liberty.

Policy Tip Sheet: Spending Reforms
https://www.heartland.org/publications-resources/publications/policy-tip-sheet--spending-reforms
The Heartland Institute outlines several reforms state legislators can take to address spending problems, including privatization, tax and expenditure limits, and retirement reforms.

Balancing State Budgets the Smart Way
http://taxfoundation.org/article/balancing-state-budgets-smart-way
Joseph Henchman of the Tax Foundation examines an array of options states can use to remedy both short-term and long-term fiscal woes and put their budgets back on sounder legal footing.

Decade of TABOR—Ten Years After: Analysis of the Taxpayer’s Bill of Rights
https://www.heartland.org/publications-resources/publications/a-decade-of-tabor---ten-years-after-analysis-of-the-taxpayers-bill-of-rights
Colorado’s TABOR (Taxpayer’s Bill of Rights) is a constitutional amendment limiting taxes and spending. Its stated mission is to “reasonably restrain most of the growth of government.” It allows only tax rate increases approved by voters, and although fees are not directly restricted, state government spending is limited to the growth of Colorado’s population plus inflation in the prior year.

State and Local Spending: Do Tax and Expenditure Limits Work?
https://www.heartland.org/publications-resources/publications/state-and-local-spending-do-tax-and-expenditure-limits-work
This empirical analysis by Benjamin Zycher of the American Enterprise Institute applies data from 49 states (excluding Alaska) over the period 1970–2010 to the empirical question of the effectiveness of TELs, which display a wide variety of features across the states.

Tax and Expenditure Limits for Long-Run Fiscal Stability
https://www.heartland.org/publications-resources/publications/tax-and-expenditure-limits-for-long-run-fiscal-stability  
Emily Washington and Frederic Sautet of the Mercatus Center examine how states can correct for the inflexibility inherent in state expenditure systems to respect taxpayers’ desires for government services over time. Although they are not a perfect solution, binding TELs prevent policymakers from increasing state spending beyond voters’ willingness to pay for government services, the authors argue.

What Is the Evidence on Taxes and Growth?
https://www.heartland.org/publications-resources/publications/what-is-the-evidence-on-taxes-and-growth
In this Tax Foundation study, William McBride examines the effects of tax policy on economic growth. He finds the literature on the topic demonstrates long-term economic growth is to a significant degree a function of tax policy. If governments seek to spur investment, he writes, they should lower taxes on the earnings of capital. If they seek to increase employment, they should lower taxes on workers and the businesses which hire them. The report also includes a discussion of the effects of progressive tax systems. 

America Will Pay More in Taxes in 2015 than it Will Spend on Food, Clothing, and Housing Combined
http://taxfoundation.org/blog/america-will-pay-more-taxes-2015-it-will-spend-food-clothing-and-housing-combined
Americans will pay $3.3 trillion in taxes to the federal government and an additional $1.5 trillion to state and local governments in 2015, notes Kyle Pomerleau of the Tax Foundation. “America’s total tax bill of $4.8 trillion is about 31 percent of the nation’s total income. This is a significant amount and is more than America will spend on food, clothing, and housing combined,” he writes. 

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, Heartland’s director of government relations, at jnothdurft@heartland.org or 312/377-4000.

Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance. In 2012, Glans was named senior policy analyst.
mglans@heartland.org @HeartlandGR