Tax and Spending Limits:

Theory, Analysis, and Policy

by Barry W. Poulson
Professor of Economics
University of Colorado at Boulder

IP-2-2004
January, 2004

14142 Denver West Parkway • Suite 185 • Golden, Colorado 80401-3119

www.IndependenceInstitute.org • 303-279-6536 • 303-279-4176 fax
Executive Summary
This study surveys the literature on tax and spending
limits (TELs). The recent literature includes more
rigorous econometric analysis, and more thorough
case studies of TELs in individual states. These stud-
ies provide important insights into the design and
implementation of TELs.
Recent empirical studies support the ‘public choice’
view that budget institutions significantly affect fiscal
policy. TELs, as well as other budget rules, can sig-
nificantly reduce state and local spending. However,
decision makers must pay attention to the design of
TELs if they are to have a significant impact in con-
straining government spending. The most effective
TELs are ones that:
a. are constitutional rather than statutory
b. limit the growth of government spending to
inflation and population growth rather than
other aggregate measures of economic activity
c. provide for immediate refunds of surplus rev-
enue above the TEL limit
d. are linked to other budget rules, most impor-
tantly to balanced budget requirements.
Budget rules also affect the way that states respond
to revenue shortfalls by cutting expenditures and/or
raising taxes. States with TELs experience lower tax
increases in periods of recession than states without
TELs.
State response to a deficit is also affected by the
general fund balance. The general fund balance is
a broad measure of the total reserves available to
stabilize the budget. States with low general fund
balances must make larger spending cuts in response
to budget deficits. In some states these reserves are
allocated to a budget stabilization. There is also evi-
dence that tax increases as a fraction of the deficit
are larger in states with low general fund balances.
When surplus revenue is generated above the TEL
limit some states simply return the revenue to the
general fund to finance expenditures. The allocation
of surplus revenue to finance government spending
Page 1
will redistribute income from those who paid the
excess taxes to those benefiting from government
spending. Special interest groups are often success-
ful in earmarking revenue that is then exempt from
the TEL limit and used finance expenditures ben-
efiting their constituents
Some TELs mandate tax cuts and tax rebates when
revenue exceeds the TEL limit. One approach
would return the surplus revenue to those who paid
the excess taxes. Rarely is this achieved; the tax cuts
and tax rebates have the effect of redistributing
income from those who paid the excess taxes to oth-
ers who may have paid little or no taxes.
Some economists have explored case studies of
TELs in individual states. In each of these cases we
find evidence that political and legal institutions
have eroded the effectiveness of TELs. In some
states this influence was apparent in the original
design of a weak and ineffective TEL. In other
states erosion in the effectiveness of the TEL was
the result of legislative actions and court decisions
that weakened various provisions of the TEL.
The next generation of TELs is designed to achieve
an optimum tradeoff between constraining the
growth of government and stabilizing government
budgets over the business cycle. These TELs link
a stringent tax and spending limit to a budget sta-
bilization fund. New TELs embodying elements of
this design have now been proposed in half a dozen
states in recent years.1 A model TEL with this design
is included as an appendix to this study.
 I. INTRODUCTION
Tax and spending limits (TELs) are budgetary rules
that determine how much taxes and/or expenditures
can increase from one year to the next. TELs can
be statutory or constitutional rules. Statutory TELs
can be modified by legislative action, while constitu-
tional TELs can only be modified by a majority vote
of citizens. TELs may originate through a legislative
statute or referendum, or they may be initiated by
citizens in states that provide for this form of direct
democracy.
TELs are now in place in 26 states (Rafool 1996).
Empirical evidence indicates that well designed
TELs impose fiscal discipline on elected officials;
poorly designed TELs do not. TELs introduced
through citizen initiatives tend to be better designed
than TELs developed by elected officials. The most
effective TELs are ones that are constitutional,
that limit the growth of government
spending to inflation and popula-
At least some
tion growth, and that provide for
states with TELs
immediate refunds of surplus rev-
appear to have
enue to the citizens who paid the
been more suc-
excess taxes. TELs are most effective
cessful than other
when linked to other budget rules,
states without
most importantly to balanced budget
TELs in con-
requirements. However, the available
straining the
evidence indicates that political and
growth of
legal institutions can (and have) erod-
government.
ed the effectiveness of TELs through
legislation and court decisions.
Two recent developments have stimulated renewed
interest in TELs in the U.S. The first is divergence
in levels and long-term rates of growth in state
revenue and spending in the states. At least some
states with TELs appear to have been more success-
ful than other states without TELs in constraining
the growth of government. Whether or not this fis-
cal discipline is a result of the impact of TELs has
been the subject of a large and growing empirical
literature. The second development is the diverging
response of the states to the revenue shortfalls that
have accompanied the recent recession. States have
Page 2
responded differently to deficits in their budgets:
some states cut spending; other states raised taxes;
and a few states, such as California, have accumulat-
ed debt of a magnitude greater than that which has
occurred in any previous recession. Sorting out the
impact of TELs and other budget rules as an expla-
nation for the different response of states to revenue
shortfalls has emerged as a major research question.
In this study we will survey the literature on TELs.
The recent literature includes more rigorous econo-
metric analysis, and more thorough case studies of
TELs in individual states. These studies provide
important insights into the design and implementa-
tion of TELs.
The most comprehensive survey of this literature
was that conducted by James Poterba (1994). In that
survey Poterba explored the fiscal impact of a wide
range of budget rules and institutions, including
TELs. His survey included international, national,
and state experience with budget rules. Poterba con-
cluded that budget rules do affect fiscal policy, how-
ever, he reached an agnostic conclusion regarding
the impact of specific rules such as TELs:
“ The existing evidence is not refined enough, how-
ever, to provide detailed advice on how narrowly
defined changes in budget rules might affect policy
outcomes.”(Poterba 1996: Abstract)
Poterba’s conclusion reflected the narrow and lim-
ited scope of research on TELs a decade ago. Most
empirical studies lumped TELs together as a single
homogeneous fiscal constraint, and then proceeded
to test whether they had a significant impact in con-
straining the growth of government. The literature
on TELs focused almost exclusively on the impact
these budget rules have in constraining the growth
of government. However, TELs have much broader
impacts about which we knew very little.
Research on TELs over the past decade has
explored a wider range of issues, including:
A. The Political Economy of TELs
Anyone familiar with TELs is aware of the complex
issues of political economy that have influenced the
design and implementation of these budget rules.2
Beyond the complexities of the TEL legislation
itself, are the institutions that have influenced the
implementation of TELs. Even the most stringently
designed TEL will have little fiscal impact if the leg-
islature and the courts do not enforce the provisions
of the TEL.
B. The Impact of TELs on State Budgets Over the
Business Cycle
Most states have mandated growth in state expen-
ditures for education K-12, Medicaid, and prisons.
If the TEL ratchets down the revenue the state can
spend during a recession, the only way to satisfy
these mandates is to drastically reduce spending
in other state programs, such as higher education,
transportation, and social welfare. The combination
of an effective TEL and mandated growth in state
expenditures may result in a structural deficit in the
budget in the long run.
C. The Impact of TELs on the Distribution of
Income
When TELs do impact revenue and expenditures
they will have direct and indirect impacts on the
distribution of income. The direct impact occurs
when surplus revenue is returned to taxpayers in
tax rebates and tax cuts. Some TELs require that
these tax rebates and tax cuts be in some propor-
tion to the excess taxes paid. However, some TELs
leave wide discretion to the legislature, which
opens opportunities for privilege seeking through
targeted tax rebates and tax cuts to benefit special
interests. Indirect effects of TELs on the distribu-
tion of income occur through budgetary changes as
some state programs expand and others contract in
response to the constraints imposed by the TEL.
Page 3
D. The Impact of TELs on Governance
From the outset, when TELs were first introduced
to constrain local property taxes, people worried
that the financing of government programs would be
shifted to the state. When states began introducing
TELs, people worried that the tax burden would be
shifted to local governments. Most TELs contain
provisions precluding states from mandating local
government functions without providing the financ-
ing to support those functions. This issue of the
impact of TELs on fiscal federalism and the rela-
tions of local, state, and federal government remains
largely unexplored.
As this brief introduction suggests, the reader
should not expect a synthesis of a well-developed
literature; but rather a discussion of conceptual and
theoretical issues, a review of the relevant empirical
analysis and case studies, and an exploration of pol-
icy issues. We conclude with a summary of recom-
mendations in designing and implementing a TEL,
and an appendix with a model TEL that embodies
these recommendations.
II. THEORETICAL ISSUES
Underlying every study of TELs is a theory of gov-
ernment, whether that theory is made explicit or not.
In his literature survey Poterba contrasted the ‘insti-
tutional irrelevance’ view with the ‘public choice’
perspective of budget rules. In the ‘institutional
irrelevance’ view, TELs, as well as other budget
rules, have no impact on fiscal policy. The problem
from this perspective is the interdependent nature of
budget rules. Riker (1980), for example, maintains
that all political institutions result from the prefer-
ences of the electorate. ‘Institutional irrelevance’
means that the institutional structure of a nation or
state contains no information beyond the aggregate
of information of voter preferences. If institutions
no longer suit the majority of the electorate they will
be overcome.
From this ‘institutional irrelevance’ perspective,
states with TELs may be ones with a conservative
electorate that would have constrained revenue and
spending, even in the absence of the TEL. On the
other hand, some states with TELs may have a more
profligate electorate that will find ways to evade and
avoid the constraints imposed by the TEL. In either
case TELs, as well as other budget rules, are nothing
more than a summary statement of voter prefer-
ences. Some econometric studies have attempted to
resolve this interdependence problem, as discussed
later in this paper.
In contrast to the ‘institutional irrelevance’ view,
some economists argue that TELs and other bud-
get rules are exogenous. The leading group of
economists identified with this view are referred
to as ‘public choice’ economists.3 They point to the
durability of many of these budgetary institutions.
For example, every state but one, Maine, has a writ-
ten constitution requiring a balanced budget. These
balanced budget rules emerged from constitutional
conventions in which, as Buchanan and Wagner
(1977) argue, citizens believed in the ‘old time fiscal
religion’ of balanced budgets. Politicians have often
found ways to circumvent these balanced budget
rules in the short run, but they have tended not to
violate them in the long run. There has been no
attempt to rescind balanced budget rules in the way
that TELs have been rescinded in some states. TELs
are more recent budgetary rules that have emerged
from a different decision process. Nonetheless, we
now have several decades of experience with TELs,
and in some states they are acquiring an acceptance
and durability of their own.
From this ‘public choice’ perspective, TELs and
other budget rules can have significant impacts on
fiscal policy. Further, ‘public choice’ economists
challenge the view that social planners are capable
of designing optimum tax and expenditure policies
over the business cycle as well as in the long run.
Their assumption is that the democratic decision
process may inherently bias fiscal policy. In the long
run a bias toward excessive spending may result in
too much growth in government. This is especially
true at the national level where government can
incur deficits and accumulate debt. At the state
Page 4
level this bias may result in excessive ratcheting up
of government revenue and spending over the busi-
ness cycle. Faced with a revenue shortfall, states
frequently increase taxes in order to balance the
budget. The higher taxes then generate higher reve-
nue growth as the economy recovers from recession,
ratcheting up revenue and spending in the long run.
In the ‘public choice’ view, TELs and
other budget rules can provide a fis- In the ‘public
cal discipline that constrains the dis- choice’ view,
cretion of decision makers, offsetting TELs and other
the bias toward expansionary govern- budget rules can
ment inherent in the democratic pro- provide a fis-
cess. Different ‘public choice’ models cal discipline
are designed to capture this fiscal that constrains
decision process in a democratic the discretion of
society. We will explore the design of decision makers,
TELs using several of these ‘public offsetting the bias
choice’ models. toward expan-
sionary govern-
A. Leviathan Model of TELs ment inherent in
the democratic
Most studies that test the impact of process.
TELs implicitly assume a Leviathan
model of state government. In the
Leviathan model, introduced by Brennan and
Buchannan (1980) TELs are viewed as part of the
social contract. Politicians are assumed to maximize
revenue and expenditures within the constraints
imposed by TELs.
Even a cursory look at the experience with TELs
in different states reveals a more complex decision
process than that assumed in the Leviathan model.
The design and implementation of TELs reflects
interaction between citizens, special interest groups,
and politicians. Some economists have attempted to
capture this more complex decision process in other
‘public choice’ models.
B. Median Voter Model of TELs
Some models attempt to capture the response of
politicians to different influences. One approach is
based upon the median voter principle: the median
voter is defined such that he equates his value of an
additional public service with the tax price of that
service (Flowers 1997; Sjonquist 1981, and Chicoine
and Walzer 1986). In a median voter model politi-
cians support TELs when at least a majority of citi-
zens incur net benefits from the TEL.
C. Rent Seeking Model of TELs
An alternative approach is based on the assump-
tion that a self- interested politician will attempt to
minimize the political costs associated with raising a
given budget or revenue (Hettich and Winer 1984).
In these models taxpayers are on opposite sides of
the budget constraint from special interest groups.
In the ‘public choice’ literature privilege seeking by
these special interest groups is referred to as rent
seeking, and models designed to capture this privi-
lege seeking are called rent seeking models. To the
extent that taxpayers can impose costs on profligate
politicians we would expect TELs to be designed
and implemented to impose a stringent budget con-
straint.
Some TELs are constitutional amendments that
originate through the citizen initiative process. Such
TELs tend to impose more stringent constraints on
the fiscal powers of government than statutory TELs
that emerge from a legislative decision process. In
either case it is unrealistic to assume that rent seek-
ing groups will simply sit back and accept new rules
of the game designed to limit their rent seeking
activities. We expect rent seeking groups to become
actively involved in the design and implementation
of TELs in order to protect what they perceive to be
their entitlements to such rents.
We expect self interested politicians to respond
to rent seeking groups in the design of TELs.
Politicians may design a TEL which is completely
ineffective in constraining government revenue and
expenditure. They can appear to be fiscally prudent
to appease taxpayer groups, when in fact they intro-
duce a weak and ineffective TEL to preempt a more
stringent TEL from being introduced through citi-
zen initiative.
Page 5
Politicians may also co-opt TELs in order to benefit
one interest group at the expense of other interest
groups (Spindler 1990). The constraints imposed
by TELs rarely impact interest groups uniformly.
The TEL limits may be imposed on a subset of state
expenditures, but not on other expenditures. Some
interest groups may be successful in earmarking
revenue used to finance their expenditures, shift-
ing those revenues outside the TEL limit. In effect
these interest groups are removed from the rent
seeking battles that accompany the budget process.
Politicians can appear to be fiscally prudent in sup-
porting TELs, when in fact they are benefiting rent
seeking groups.
The ability of rent seeking groups to protect what
they perceive as their entitlements to rents depends
upon the response of politicians. The special interest
effect occurs when politicians pursue policies that
benefit special interests at the expense of the public
interest. Politicians may design TELs that are weak
and ineffective in constraining the fiscal powers of
government. Even with a well-designed TEL, politi-
cians may successfully evade or erode these fiscal
constraints to permit a more rapid growth in rev-
enue and spending.4
Once we recognize that TELs emerge from a com-
plex decision process involving citizens, special inter-
est groups, and politicians, the impact of TELs on
fiscal policy is uncertain. If there is a bias toward
excessive levels of revenue and spending over the
business cycle and in the long run, then TELs have
the potential to enhance the welfare of citizens. A
TEL can be designed and implemented to constrain
the growth of government in the long run. TELs
may also be designed to provide for greater stability
of government budgets over the business cycle.
On the other hand, TELs may be designed and
implemented that have little impact on fiscal policy.
At worse, poorly designed TELs can result in ineffi-
ciencies and inequities in fiscal policies that diminish
the welfare of citizens.
III. EMPIRICAL ANALYSIS
Most empirical studies have focused on the issue of
TELs as constraints on government revenues and
expenditures. This is consistent with the perception
that TELs are designed and implemented to impose
fiscal discipline on governments. However, it is not
always clear what is meant by fiscal discipline.
Some people might argue that fiscal discipline
means decreasing the absolute size of government.
Indeed a recent failed TEL initiative in Colorado
called for decreasing the absolute size of local gov-
ernment by a fixed dollar amount each year.
Others might argue that TELs are designed to
constrain the growth of government. Few would
disagree that an effective TEL should hold the
growth of government below the double digit rates
of increase in revenue and spending that occurred
during the inflationary period of the 1970’s. It was
that inflationary expansion, in which government at
all levels increased relative to the private sector, that
triggered the tax revolt, with TELs designed to con-
strain the growth of local and state government.
If fiscal discipline is interpreted to mean constrain-
ing the growth of government relative to the private
sector, then tax and spending limits may be linked
to a measure of aggregate economic activity such as
state income. The problem with these TELs is that
they permit a rapid growth in government in peri-
ods of prosperity that cannot be sustained when the
economy enters a recession with falling revenues. As
noted earlier, such TELs may result in a ratcheting
up of government spending over time, if govern-
ments respond to falling revenues by increasing
taxes.
A more stringently designed TEL is linked to infla-
tion and population growth. In the long run this type
of TEL has the potential to constrain the growth
of government below the growth of the private sec-
tor. The criticism of this type of TEL is a ratchet
down effect as revenue falls in periods of recession.
However, this type of TEL can be linked to a bud-
Page 6
get stabilization fund to provide greater stability to
revenues and expenditures over the business cycle,
and to limit the ratchet down effect in the long run.
This combination of a TEL and budget stabilization
fund permits citizens to achieve an optimum trad-
eoff between stabilizing the budget over the business
cycle and constraining the growth of government in
the long run.
Whether or not we perceive TELs to have been suc-
cessful in constraining the growth of government
depends upon what we mean by fiscal discipline.
With this caveat in mind we turn to the empirical lit-
erature that has attempted to answer this question.
A. TELs as Constraints on Government Revenue
and Spending
A number of studies have tested whether TELs con-
strain government revenue and spending. The wide
divergence in the results of these empirical studies
reflects the use of different methodologies and data
sets. Early empirical studies focused on different
political units, and analyzed the impact of TELs
over different time periods.
Cross section studies of the impact of TELs on state
and local spending tended to find TELs ineffective
in constraining government spending. Bails (1983)
conducted one of the earliest cross section studies
and found that in the majority of states TELs had an
insignificant impact on state spending. An extension
of this work essentially confirmed this finding (Bails
1990). Cross section studies by Abrams and Dougan
(1986) and Cox and Lawry (1990) also found TELs
to be ineffective in constraining state spending.
Time series studies have found mixed results for the
impact of TELs on state and local spending. A study
by Kenyon and Benker (1984) compared the growth
of state spending relative to personal income in TEL
states with that in non TEL states and found no sig-
nificant difference. A study by Dougan (1988) exam-
ined time series data from 1960 to 1984 for 16 states.
He found that in 7 of these states the TEL had a
significant negative impact on government spending.
Poulson and Kaplan (1994) used time series analysis
to examine the impact of Colorado’s first statutory
TEL, and found that it significantly reduced state
spending in the short run, but not in the long run.
Joyce and Mullins (1991) also found evidence that
TELs significantly reduce state revenues in the short
run, but not the long run.
One of the problems in all of these empirical stud-
ies is that they do not account for the interdepen-
dent nature of TELs. If states that experience rapid
increases in spending are more likely to adopt TELs,
then the empirical analysis of the impact of TELs on
state spending will be biased. A few empirical stud-
ies have addressed this interdependence problem.
One approach to this problem is to control for some
measure of voter preference, such as the political
party of elected officials. This can reduce the pro-
clivity that observed correlation between budget
rules and fiscal outcomes simply reflects correlation
between these variables and an omitted variable for
voter preferences. But, if this approach does not
fully capture the impact of voter preferences it may
still lead to spurious results.
An alternative approach to this problem is to solve
for interdependence using variables that affect bud-
get rules but not fiscal policy. Reubens (1995) uses
this approach to estimate the impact of TELs. In
some states, laws provide for the initiative process
that allows citizens to directly propose and vote on
TELs. These laws should be positively correlated
with the passage of TELs, but unrelated to current
expenditure levels. Substituting this variable for
the TEL variable in her model enables Reubens to
separate the effects of the TEL from the effects of
changes in voter preferences for TELs. When this
model is run with the TEL variable the results show
a positive relationship between TELs and govern-
ment spending. When the model is run using the ini-
tiative variable the effect of the TELs is to reduce
state spending 1.8%.
Another criticism of these empirical studies is that
they do not account for other variables that could
Page 7
impact state spending. More recent empirical stud-
ies use panel data, cross sectional time series data,
which can produce more reliable estimates because
they include other variables besides TELs that can
influence government revenue and spending. For
example empirical evidence suggests that govern-
ment expenditure, in both levels and growth rates,
is closely related to income, population, and other
economic variables.
One of the first studies to utilize panel data control-
ling for the effects of population and income on
the public sector is a study by Elders (1992). Elders
found that when he controls for the effects of these
economic variables, TELs have a significant effect in
reducing the growth of government.
Shadbegian (1996) also uses panel data to test the
impact of TELs on the size and growth of state
government. He includes three control variables,
population, income, and federal intergovernmental
grants. Shadbegian finds that TELs reduce the size
of government, and lower government spending
growth in states with low income growth. However,
he finds that TELs increase government spending
growth in states with high income growth. In states
with high income growth TELs provide cover for
politicians who appear to be fiscally prudent, but
who in fact are increasing government spending
more than their counterparts in states without TELs.
A criticism of all the studies mentioned above is that
they treat all TELs alike. The only study to take into
account differences in TELs is that of New (2001).
New uses panel data to analyze the impact of TELs
on the level of state and local spending. As in other
panel data studies he controls for other economic
and demographic variables that could impact state
and local spending. He includes variables indicat-
ing whether the TEL was passed by initiative, by
the legislature, by constitutional convention, or by
referendum. He finds that TELs passed through
the initiative process significantly reduce state and
local spending; but, TELs enacted by state legisla-
tures actually increase spending. Further, he finds
that states in which TELs limit increases in revenue
 and spending to the sum of inflation and popula-
tion growth, i.e. Colorado and Washington, reduce
government spending more than states in which the
TEL limit is linked to state personal income. Finally,
he finds that states in which the TEL mandates
immediate refunds of surplus revenue to taxpayers,
i.e. Colorado, Michigan, Missouri, and Oregon, are
more successful in reducing government spending.
A study by Bails and Tieslau (2000) is unique in
using panel data to analyze the impact of a compre-
hensive set of budget institutions on state and local
spending. These include; tax and spending limits,
line item veto, balanced budget requirements, and
term limits. As in other panel data studies they con-
trol for other economic and demographic variables.
They find that the following budgetary institutions
significantly reduce the rate of growth of state and
local spending: tax and spending limits, balanced
budget requirements in the presence of tax and
spending limits, supermajority vote
The most effective requirements in the presence of bal-
TELs are ones anced budget requirements, term
that are constitu- limits, and the initiative process. Real
tional, that limit per capita state and local spending
the growth of gov- in states with TELs, is estimated to
ernment spend- be $42 lower than in states without
ing to inflation TELs. In states with both TELs and
and population balanced budget requirements spend-
growth, and that ing is reduce by nearly $135. In states
provide for imme- with the comprehensive budgetary
diate refunds of institutions tested, they find that real
surplus revenue per capita expenditures are reduced
above the TEL nearly $473.
limit.
Thus, recent empirical studies support
the public choice view that budget
institutions significantly affect fiscal policy. TELs, as
well as other budget rules, can significantly reduce
state and local spending. Decision makers must pay
attention to the design of TELs if they are to have
a significant impact in constraining government
spending. The most effective TELs are ones that are
constitutional, that limit the growth of government
spending to inflation and population growth, and
that provide for immediate refunds of surplus rev-
Page 8
enue above the TEL limit. TELs are most effective
when linked to other budget rules, most importantly
to balanced budget requirements.
B. TELS and Budget Stabilization Over the
Business Cycle
When Governor Owens of Colorado recently
encouraged Governor Schwarzenegger of California
to adopt a TEL, he argued that this would enable
him to stabilize the state budget over the business
cycle (Owens 2003). Owens maintained that the
TABOR Amendment limited increases in govern-
ment revenue and spending in the 1990’s, so that it
was easier for Colorado to cope with the revenue
shortfalls in the current recession. When California
essentially abandoned their TEL in the late 1980’s
this permitted unconstrained growth in revenue and
spending to unsustainable levels in the 1990’s. The
question raised by this exchange between Governor
Owens and Governor Schwarzenegger is whether
states with effective TELs have been subject to less
volatility in revenues and spending over the business
cycle compared to states without effective TELs.
This question remains largely unexplored in the lit-
erature.
One of the few studies to analyze this question is
a study by Poterba (1994) that explores how states
adjust their budgets to unexpected shocks. Poterba’s
approach is to measure how changes in state spend-
ing and taxes are influenced by fiscal institutions.
He examines the impact of balanced budget rules,
TELs, and general fund balances. Most state con-
stitutions prevent state governments from running
deficits. After a budget is passed, however, actual
revenues and expenditures may deviate from pro-
jections, resulting in unexpected deficits. States
differ in the stringency of balanced budget rules
that require elimination of the deficit. Some states
require elimination of the deficit in the current fis-
cal year; while others allow the deficit to be carried
forward into the next fiscal year; and a few states do
not require the deficit to be eliminated in the fol-
lowing fiscal year.
 To offset deficits states may draw down their gen-
eral fund balances or rainy day funds. Most states
allow borrowing to offset the deficit. In some states
the borrowing must be repaid in the current fiscal
year; while others allow the debt to be repaid in the
following fiscal year, but prevent the use of long
term debt to cover the deficit. In the short run, of
course, states may rely upon a variety of budgetary
gimmicks to satisfy balanced budget rules: deferring
expenditures to the following fiscal year, altering the
fiscal year, raiding cash and trust funds, etc.
Poterba explores how states respond to revenue
shortfalls that accompany recessions. He finds that
states with TELs experienced lower
tax increases in periods of recession
... states with than states without TELs. In TEL
TELs experienced states a $1 increase in the budget
lower tax increas- deficit results in a $0.47 tax increase,
es in periods of compared to a $1.03 tax increase in
recession than states without TELs. He finds no
states without evidence that spending cuts are any
TELs. larger in states with TELs.
Poterba also explores how a state
response to a deficit is affected by the general fund
balance. In some states these reserves are allocated
to a budget stabilization or rainy day fund. The gen-
eral fund balance is a broader measure of the total
reserves available to stabilize the budget. Poterba
finds evidence that states with low general fund bal-
ances must make larger spending cuts in response to
budget deficits. In states with general fund balances
of more than 2% of spending, spending is reduced
by $0.25 per dollar of deficit. In states with lower
general fund balances, the spending cuts are more
than double, $0.55 per dollar of deficit. There is also
some evidence that tax increases as a fraction of the
deficit are larger in states with low general fund bal-
ances.
Poterba finds that fiscal institutions do affect the
way that states respond to revenue shortfalls by cut-
ting expenditures and/or raising taxes. However, he
concludes that the question of how fiscal institutions
Page 9
affect the level of government spending remains an
open question.
C. TELs and the Distribution of Income
A fuller understanding of TELs would extend the
analysis to their impact to income distribution.
When surplus revenue is generated above the TEL
limit some states simply return the revenue to the
general fund to finance expenditures. In some states
the surplus is held in a general fund balance. When
that general fund balance is used to finance a budget
stabilization fund then the moneys are expended
during revenue shortfalls. In some cases the general
fund balances are used to finance targeted expendi-
tures such as education or capital expenditures. As
we would expect from our rent-seeking model, gen-
eral fund balances may become a target for different
special interest groups. The allocation of surplus
revenue to finance government spending will redis-
tribute income from those who paid the excess taxes
to those benefiting from government spending.
One of the least understood aspects
of TEL is the way in which they ... special inter-
interact with other statutory and con- est groups are
stitutional provisions impacting fiscal often successful
policies. As our rent-seeking model in earmarking
suggests, special interest groups are revenue that is
often successful in earmarking reve- then exempt from
nue that is then exempt from the TEL the TEL limit
limit and used finance expenditures and used finance
benefiting their constituents. expenditures
benefiting their
Some TELs mandate tax cuts and constituents.
tax rebates when revenue exceeds
the TEL limit. One approach would
return the surplus revenue to those who paid the
excess taxes. Rarely is this achieved; the tax cuts
and tax rebates have the effect of redistributing
income from those who paid the excess taxes to
others who may have paid little or no taxes. One
of the few studies to explore how tax cuts and tax
rebates impact the distribution of income is Poulson
(1999 and 2001). He finds that in Colorado surplus
revenue above the TABOR limit was not offset by
tax cuts and tax rebates that returned the surplus to
those who paid the excess taxes. Most of the surplus
revenue was generated by the income tax, and some
of the surplus was offset by broad based income and
sales tax cuts. But much of the surplus was offset by
targeted tax cuts and tax rebates benefiting special
interest groups. The impact of this redistribution
was egalitarian, shifting surplus revenue from upper
income families who paid most of the excess income
taxes, to lower income families who paid little or no
taxes.
D. TELs and Governance
A final set of issues involves the impact of TELs
on governance. One question is the extent to which
TELs may erode fiscal federalism. In some states
TELs may be imposed at the local level but not the
state level, as was the case with Prop 13 in Califonia.
A number of states have introduced TELs at the
state level but not the local level. Other states, such
as Colorado, introduced TELs designed to constrain
fiscal policy at both the state and local level.
From the outset a major concern was that TELs
imposed at one level of government would simply
shift the financing of programs to another level of
government. The obvious example is education K-
12 which is often financed from revenues received
by both state and local government. Some TELs
address this issue by limiting the power of the state
to mandate expenditures at the local level without
financing those expenditures.
Satisfying the conditions imposed by TELs requires
new administrative procedures. For example, when
TELs require voter approval for increase in taxes
and debt, this requires new accounting, reporting,
and election procedures. Litigation surrounding
TELs may require additional legal resources. These
administrative procedures may be costly, particularly
for local governments with limited resources.
The costs and other burdens of TELs must be
weighed against the benefits to citizens in exercising
control over fiscal powers of government directly
Page 10
rather than leaving fiscal decisions to the discretion
of their elected representatives. Surveys often reveal
widespread support for TELs; nonetheless, assessing
the costs and benefits to citizens of exercising con-
trols over the fiscal powers of government through
TELs remains elusive.
IV. CASE STUDIES
Empirical studies provide important insights into
TELs. However, the effectiveness of TELs also
depends upon the unique political and legal institu-
tions found in each state. Our public choice models
suggest that the way in which the legislature and
the courts choose to interpret and implement the
TEL is crucial. Surprisingly little research has been
conducted into this question, and as a result it is one
of the least understood aspects of TELs, especially
by economists. Analysis of the way in which political
and legal institutions influence TELs does not lend
itself to econometric analysis, and publication in
economics journal, and so economists have contrib-
uted very little to this question.
Some economists have explored case studies of
TELs in individual states, which are usually pub-
lished in state and national think tanks. We will
review case studies for several states including:
California, Missouri, Florida, Washington, Michigan,
and Colorado. In each of these cases we find evi-
dence that political and legal institutions have erod-
ed the effectiveness of TELs. In some states, such as
Florida, this influence was apparent in the original
design of a weak and ineffective TEL. In other
states erosion in the effectiveness of the TEL was
the result of legislative actions and court decisions
that weakened various provisions of the TEL.
A. California5
The origins of the tax revolt can be traced to the
Gubernatorial Administration of Ronald Reagan
in California in the early 1970s. Reagan’s Prop1 set
the standard for all subsequent TELs. Prop 1 set a
limit on state spending equal to the current ratio of
state expenditures as a share of state income, and
 required that percentage to decrease by .1% each
year until it reached 7%, at which time the legis-
lature (by two thirds vote) could halt the annual
reduction. To give some idea how stringent this
original TEL was, total spending as a share of state
income in California today is approaching 10%.
While Prop 1 lost at the polls in 1973, it launched a
tax revolt in California that resulted in initiatives to
introduce TELs at both the local and state level.
Prop 13 to limit local property taxes wan enacted in
1978. Prop 13 continues to be one of the most strin-
gent limitations on local property taxation in the
country.
Prop 4, the Gann Amendment,
In 1990 the
was one of the first TELs adopted
Gann amend-
by any state. The Gann amend-
ment was dealt a
ment limited increases in state
death blow when
and local appropriations from tax
Prop 111 was
revenues to the sum of population
enacted manda-
growth and inflation. The Gann
ting increases in
Amendment passed by nearly a
expenditures for
3 to 1 margin. Initially the Gann
education K-12,
Amendment was effective in con-
and increasing
straining government expenditures.
the Gann limit.
In 1987, when revenue exceeded
the budget limit, California taxpay-
ers received a $1.1 billion tax rebate.
Over time, however, the Gann Amendment became
less effective as a constraint on California fiscal
policy. Because the limit was imposed only on
appropriations from tax revenues, legislators relied
increasingly on fees and other non-tax revenues. In
1990 the Gann amendment was dealt a death blow
when Prop 111 was enacted mandating increases in
expenditures for education K-12, and increasing the
Gann limit. Since then, the Gann Amendment has
ceased to be an effective constraint on government
fiscal policy in California.
B. Missouri6
One of the first TELs introduced in the states was
the Hancock amendment in Missouri, in 1980. That
Page 11
TEL limited the growth in state revenue to the rate
of increase in personal income. Tax revenue was to
be held constant as a share of personal income, with
surplus revenue rebated to taxpayers based on state
income taxes.
The Hancock Amendment was never an effective
constraint on the growth of revenue and spen-
ding, and no tax rebates were ever made under the
Amendment. The reason is that legislators, aided by
the courts, were able to successfully evade and avoid
the limits imposed by the Amendment. Legislators
exempted an increasing share of revenue from the
limit. Initially, only 2% of revenue was exempt from
the limit; but a decade later 18% was exempt. Over
that period state revenue grew far in excess of perso-
nal income; in some years the growth in revenue was
more than double the growth in personal income.
Experience in Missouri demonstrates how the legis-
lature and the courts can erode the effectiveness
of a TEL. The Missouri legislature failed to enact
enabling legislation to implement the
Hancock Amendment. As a result Experience in
there was never agreement on what Missouri dem-
constituted total state revenue, nor onstrates how
what constituted surplus revenue the legislature
above the limit. Different state agen- and the courts
cies came up with their own conflic- can erode the
ting interpretations. effectiveness of a
TEL.
Soon after the Hancock amendment
was passed the voters passed a 1%
sales tax increase; half of which was earmarked
for property tax reduction, and half of which was
earmarked for expenditures for education K-12.
Both the Missouri Budget Office, and the State
Auditors Office ruled that this earmarked revenue
was not subject to the Hancock limit. Amazingly,
the Missouri supreme Court agreed, ruling that
this statutory tax increase preempted the revenue
limit imposed by the Missouri Constitution. Other
tax increases soon followed: the legislature enacted
a statutory motor fuel tax increase that was also
ruled to be exempt from the revenue limit. Other
tax increases were approved by voters with language
that specifically excluded these revenues from the
revenue limit. Over time special interests and politi-
cians became more adept at circumventing the reve-
nue limit, and the courts sanctioned these acts, even
when this violated the spirit if not the letter of the
constitution. In 1993 the legislature enacted another
tax increase earmarked for expenditures for educa-
tion K-12, without voter approval. Corporate taxes
were increased, and corporations, small business,
and higher income individuals were for the first time
required to pay state income taxes on the federal
income taxes they paid.
Missouri citizens responded to this increased tax
burden by attempting to strengthen the constitu-
tional constraints imposed on state fiscal policy. In
1994 citizens placed on the ballot an amendment
requiring voter approval for new taxes. The opposi-
tion, including the Governor and legislature, were
able to include in the ballot language the statement
that the proposed Amendment would cause:
“state and local spending cuts ranging from $1 bil-
lion to $5 billion annually. Cuts would affect pris-
ons, schools, colleges, programs for the elderly,
job training, highways, public health, and other
services.”(McCarty 2003:20)
It is not surprising that the proposed Amendment
was defeated by a two to one margin.
In 1996 citizens were successful in enacting a more
stringent Amendment than the one proposed two
years earlier. That Amendment requires voter
approval for any tax increase that exceeds $50 mil-
lion, or one percent of state revenues, whichever
is less. That Amendment also requires refunds
of excess tax revenues if growth in state revenue
exceeds the growth of personal income by one per-
cent or more.
That Amendment was passed with the support of
the new Governor, and the legislature, and the busi-
ness community. In contrast to the earlier proposed
Amendment this new Amendment contained the
following language:
Page 12
“This proposal would not affect current state or
local funds, future effects would depend upon the
actions of the General Assembly and Missouri vot-
ers.” (McCarty 2003:20)
In contrast to the original Hancock Amendment,
this new TEL has significantly reduced state revenue
and spending. Since 1996 Missouri has offset $2.5
billion in surplus revenue with a combination of tax
cuts and tax rebates.
C. Florida7
In Florida citizens in 1994 gathered enough signa-
tures to place an Amendment on the ballot requir-
ing voter approval for any new tax or tax increase;
but, the Florida Supreme Court ruled that the initia-
tive could not be placed on the ballot because it did
not pass legal muster as a citizen initiative.
The response of the Florida Legislature to this
failed citizen initiative was to design an Amendment
to preempt another citizen initiative. The legisla-
ture placed an Amendment on the ballot to impose
a revenue limit linked to the growth of state per-
sonal income. The growth rate of state revenue was
capped at a five year moving average
of state personal income growth. Two Florida legisla-
provisions of that TEL would render tors appear to be
it completely ineffective as a con- fiscally prudent
straint on the growth of state govern- when in fact they
ment in Florida. designed a TEL
sanctioning high-
One provisions excluded several com- er levels of rev-
ponents of revenue from the TEL enue and spend-
cap, including: Medicaid matching ing than occurred
funds, charges imposed by local and before the TEL
regional governments, and debt ser- was introduced.
vice.
A second provision maintained the growth in the
TEL cap regardless whether the cap was reached in
the previous year. The revenue cap increases each
year with growth in personal income regardless of
what is happening to actual revenue. As a result the
 revenue cap has not and never will constrain the
growth of state revenue and spending.
Some have described the Florida TEL as a ‘Modern
Day Fairy Tale”. They maintain that the Florida
Legislature deliberately designed an ineffective
TEL to preempt a more stringent TEL from being
introduced through citizen initiative. Florida leg-
islators appear to be fiscally prudent when in fact
they designed a TEL sanctioning higher levels of
revenue and spending than occurred before the TEL
was introduced. Clearly the actions of the Florida
Legislature and Courts have left TELs as a mean-
ingless exercise in that state.
D. Washington8
Washington State joined the tax revolt in 1979
enacting a tax and spending limit through the ini-
tiative process, Initiative 62. That Amendment
limited increases in state revenue to the rate of
growth in personal income. As is often the case with
TELs linked to the growth in personal income the
Washington Tel was never an effective constraint
on the growth of government. In the years after the
TEL was enacted the state was able to pass a series
of tax increases, and yet remain within the TEL
limit.
In the early 1990s citizens responded to the
increased tax burden by passing a more stringent
TEL through the initiative process.
Statutory TELs Initiative 601 imposed a limit on
are no safer than the growth in state spending equal
the next vote of to inflation plus population growth.
the legislature. When the new TEL took effect in
1996 legislation was passed to ensure
that spending was contained within
the TEL limit. Budget cuts of $120 million were
enacted reducing expenditures for administration,
social services, and prisons. Institutions of higher
education were required to trim their benefits by
$39 million. In subsequent years, when revenue
growth exceeded the limit, tax cuts were enacted
to offset the surplus revenue. Washington citizens
voted to repeal the motor vehicle tax.
Page 13
The flaw in the Washington TEL was that it was
a statutory rather than a constitutional provision.
Statutory TELs are no safer than the next vote of
the legislature. In 2000, when the legislature wanted
to pass a budget that exceeded the TEL limit, they
simply obtained the supermajority vote required to
suspend the TEL limit. Since then the Washington
TEL has ceased to be an effective constraint on gov-
ernment.
E. Michigan9
The Michigan TEL is unique in several respects.
The TEL is a constitutional amendment introduced
in 1978 that limits the growth of revenue to a fixed
ratio of state personal income. That ratio is applied
to either personal income in the prior year, or to
average personal income in the prior three years,
whichever is higher. When actual revenue exceeds
the revenue limit by 1% or more, excess revenue
is refunded to taxpayers based on the Michigan
income tax.
What is unique in the Michigan TEL is the formu-
laic allocation of surplus revenue to and from a
budget stabilization or rainy day fund. When annual
personal income grows more than 2%, the percent-
age in excess of 2% is multiplied by total revenue
to determine the amount to be automatically trans-
ferred from the general fund to the rainy day fund.
All general fund surpluses are also transferred into
the rainy day fund. Withdrawals from the rainy day
fund are also automatic. When personal income
growth is less than 0%, the deficiency under 0% is
multiplied by total revenue to determine the amount
to be transferred from the rainy day fund to the
general fund. The legislature can also appropriate
money from the rainy day fund if unemployment
rises above 8%. In an emergency the legislature can,
by supermajority vote, approve emergency transfers
from the rainy day fund.
Just prior to the recent recession in 2000 the state
had accumulated a rainy day fund of $1.2 billion,
equal to 13.2% of state spending that year. As you
would expect with the accumulation of such a siz-
 Despite the dis-
sipation of the able rainy day fund, the fund became
rainy day fund in a target for special interest groups.
response to rent There is an ongoing appropriation
seeking activities from the rainy day fund over the
by special inter- period 2000 to 2008 of $32 million for
est groups, it has education K-12, and $25 million for
served to stabilize water pollution control. Legislators
the Michigan have been able to transfer money
budget over the from the rainy day fund for a variety
business cycle. of purposes by simply declaring an
emergency.
Despite the dissipation of the rainy day fund in
response to rent seeking activities by special interest
groups, it has served to stabilize the Michigan bud-
get over the business cycle. In the recent recession
the state was able to transfer close to $1 billion from
the rainy day fund to offset revenue shortfalls.
F. Colorado10
Colorado was one of the first states to impose a stat-
utory cap on the growth of state spending. In 1978, a
cap of 7% was placed on the growth of general fund
expenditures. In the late 1970s some surplus revenue
above that limit was rebated to taxpayers. When
recession hit in the early 1980’s Colorado, like other
states, responded by increasing taxes to balance the
budget. That increase in taxes ratcheted up govern-
ment spending at rates in excess of the growth in
state income in subsequent years. The Colorado
TEL, like many other statutory TELs, was simply
ignored by the legislature.
In the late 1980s citizens organized to put a more
stringent TEL on the ballot. After several failed
attempts the TABOR Amendment was enacted in
1992 through citizen initiative. Tabor is the most
stringent TEL introduced in any state. TABOR
restricts the growth in state revenue and spending to
inflation plus the percentage change in state popu-
lation. Surplus revenue above that limit must be
rebated to taxpayers.
The TABOR limit ratchets-down the amount of
revenue the state can keep and spend as revenue
falls. The TABOR limit is determined by applying
the sum of inflation and population growth to actual
TABOR revenues or the TABOR limit, whichever is
lower. When revenue falls in a recession, that lower
revenue then sets a new base against which the sum
of inflation and population growth is applied.
The TABOR Amendment also placed a procedural
constraint on the power of government to raise
taxes. Voter approval is required for any new taxes,
tax rate increases, extension of an expiring tax, or
tax policy change directly causing a net revenue
gain. Voter approval is also required for state and
local government to retain and spend revenue in
excess of the limit.
In a failed attempt to preempt this stringent TEL
from being introduced through citizen initiative the
legislature enacted a statutory TEL. In 1992 the
Arveschaugh-Bird Amendment placed a cap on gen-
eral fund appropriations equal to the lesser amount
of 5% of Colorado personal income in the calendar
year two years prior to the start of the fiscal year or
6% over the previous year’s general fund appropria-
tion, with exceptions for federal mandates and court
orders.
Over time the Legislature has interpreted the 6%
statutory cap as a floor rather than a ceiling on the
growth in general fund expenditures. The reason
is that the general fund spending in a given year
determines the base against which the spending cap
is applied in determining the amount of general
fund spending permitted in the following year. The
distortions this introduces in state spending have
become very evident in recent years.
For the foreseeable future the Arveschaugh-Bird
amendment will have little if any impact on state
fiscal policies. This is because the 6% limit on the
growth in general fund expenditures will not be a
binding constraint on the legislature. That limit is
significantly above the limit
imposed by the Tabor Amendment
Initially the TABOR Amendment was non-binding
because the growth in state revenues was less than
the TABOR limit. The first year in which TABOR
became a binding constraint was 1997. Over the next
five years more than $3 billion in surplus revenue
was either rebated to taxpayers, or offset by tax
reduction. A referendum to spend a portion of the
surplus revenue was defeated by taxpayers.
The Legislature has also chosen to interpret the
TABOR limit as a floor rather than a
ceiling on the revenue that the state can keep and
spend. This introduces distortion and
inefficiency in state finance, and the problem has
become especially evident in the
current fiscal crises. Even if it might be prudent for
the Legislature to hold revenue and
spending growth below that permitted by the
TABOR limit, the Legislature has often failed to do
so.
The Legislature has interpreted TABOR so as to
erode the constraints imposed by the limit, and to
exacerbate the fiscal crises resulting from the cur-
rent recession. The Legislature chose to retain the
surplus revenue generated in the current year in the
general fund reserve, and to finance rebates from
the surplus revenue generated in the following year.
This scheme worked fine when revenues were ris-
ing in the boom years; but the flaw in this scheme
became apparent in the current fiscal crises. With
recession the TABOR surplus disappeared, and the
state had to finance a rebate from reductions in cur-
rent state spending. The decision of the Legislature
to finance taxpayer rebates from revenues received
in the year after the TABOR surplus is generated
has exacerbated the fiscal crises. The Legislature has
also chosen to increase the TABOR limit to adjust
for undercounting of population growth in the last
decade. This permitted the state to retain and spend
more revenue over the coming decade.
A different set of problems has resulted from the
way in which the legislature has chosen to offset
surplus revenue More than 20 bills have been passed
offsetting the TABOR surplus with tax rebates and
tax cuts. Most of the TABOR surplus has been gen-
erated by the income and sales taxes; and some of
that surplus has been offset by rebates and reduc-
tions in the income and sales taxes. However, the
increased use of targeted tax cuts and tax rebates
to benefit narrow interest groups means that less of
the surplus is refunded to the people who paid the
excess taxes.
A major problem emerged when a constitutional
provision was introduced requiring constant growth
in expenditures for education K-12 from income tax
revenue earmarked for that purpose and exempt
from the TABOR limit. This Amendment, which
requires a constant ratcheting up of expenditures
for education K-12, combined with the TABOR
Amendment, which ratchets government revenue
down, places the legislature in an untenable posi-
tion. The legislature has discretion over less than
one third of the state budget because more than
two thirds is mandated by the required expenditures
for education K-12, Medicaid, and prisons. When
the recession resulted in a revenue shortfall the
legislature was required to make draconian cuts in
higher education and social services. In the long
run these provisions in the fiscal constitution will
result in a structural deficit, which is prohibited
by the balanced budget provision of the Colorado
Constitution. The Colorado legislature is now con-
sidering changes in each of these constitutional
provisions in order to avoid a future
fiscal crises.11
Colorado is cur-
Finally, in Colorado TELs have been rently experienc-
more effective in constraining local ing the worst
government than state government. fiscal crises in
The result is that financing for edu- decades.
cation K-12 has shifted significantly
from local government to the state
government in Colorado. The Tabor Amendment
requires the state to backfill local governments
whenever state legislation has a negative impact on
local government revenues. When the state enacted
a cut in the business personal property tax it was
required to backfill local governments for the loss
of revenue resulting from this tax cut. Despite these
 provisions, the financing and administration of some
programs, such as education K-12, has shifted from
local government to the state govern-
While tax and ment.
spending limits
have been effec- Colorado is currently experiencing
tive in slowing the worst fiscal crises in decades.
the growth in While tax and spending limits have
state government been effective in slowing the growth
in the long run, in state government in the long run,
they have not they have not been very effective in
been very effec- smoothing the growth of state rev-
tive in smoothing enue and spending over the business
the growth of cycle. Colorado does not have a true
state revenue and budget stabilization fund. The current
spending over the fiscal crises reveals the need for such
business cycle. revenue and expenditure smoothing
in state government during periods
of recession and slower economic
growth. Legislation has been introduced in Colorado
that would link the TABOR limit to both an emer-
gency reserve fund, and a budget stabilization fund.
This legislation is similar to the model TEL in the
Appendix to this study.
IV. THE NEXT GENERATION OF TELS12
New TELs have been proposed in half a dozen
states over the past year.13 This next generation of
TELs depart considerably from the TELs now in
place. It is possible to introduce a TEL to constrain
the growth of government in the long run that does
not serve to stabilize the budget over the busi-
ness cycle. That is in fact the nature of Colorado’s
TABOR Amendment.
On the other hand, a TEL designed to stabilize the
budget over the business cycle, may or may not con-
strain the growth of government in the long run. For
example, Michigan’s TEL has been used to stabilize
the budget over the business cycle, but it is not clear
that it has constrained the growth of government.
If all of the surplus revenue generated in periods
of rapid growth is returned to the general fund to
finance spending and to offset revenue shortfalls in
periods of recession, then the TEL will do little to
constrain government spending in the long run.
Thus, we can think of a tradeoff in the allocation of
surplus revenue above the TEL limit. The larger the
share of that revenue returned to taxpayers through
tax cuts and tax rebates, the less of that surplus
revenue is available to stabilize the
budget over the business cycle, and The next gen-
the more that TEL will constrain the eration of TELs
growth of government. The larger the is designed to
share of the surplus revenue set aside achieve an opti-
in a Budget Stabilization Fund the mum tradeoff
more effective the TEL will be in off- between con-
setting revenue shortfalls, but, the less straining the
effective it will be in constraining the growth of govern-
growth of government in the long run. ment and stabi-
Understanding this tradeoff is crucial lizing government
in designing a TEL. budgets over the
business cycle.
The next generation of TELs is
designed to achieve an optimum trad-
eoff between constraining the growth of government
and stabilizing government budgets over the busi-
ness cycle. One set of rules is required to introduce
an effective brake on the revenue the government
can spend, i.e. a tax and spending rule (TEL). A sec-
ond set of rules must be introduced governing how
the surplus revenue above the TEL is allocated to
the budget stabilization fund. A third set of rules is
required for allocating money from the budget sta-
bilization fund to the general fund to offset revenue
shortfalls and stabilize the budget during recession.
A. Rules Defining the TEL Limit
The states have experimented with a variety of lim-
its in designing their TELs. The most widely used
limit is a measure of the rate of growth of income
over some historical period. There are a number
of criticisms of this type of TEL as a constraint on
the growth of government. This limit tends to be
less stringent compared to other limits, resulting
in a more rapid growth of government. Depending
upon how the limit is applied it may have little or no
impact on the growth of government.
 In the present context, the criticism of a TEL limit
based on the growth in personal income over an
historical time period is that it is less effective in
stabilizing the budget over the business cycle. Such a
limit permits a very rapid rate of growth in revenue
and spending in periods of rapid economic growth.
Even when the limit is triggered it does so only with
some lag. As a result this type of limit is less effec-
tive than one that has no lagged impact; indeed it is
possible that such a limit could actually be pro-cycli-
cal.
Recent studies have demonstrated that the most
stringent TELs define the limit as the sum of infla-
tion and population growth. While TEL limits
defined in terms of the growth of population and
inflation have proven effective in constraining the
growth of government, they have proven less effec-
tive in stabilizing the budget over the business cycle.
If such TELs ratchet down revenue and spending in
periods of recession, they may also be pro-cyclical.
B. Rules Defining the TEL Base.
The states have also experimented with different
revenue and expenditure bases against which the
TEL limit is applied. In general it is fair to say that
the broader the base the more effective the TEL. If
interest groups are able to exempt portions of the
revenue and or expenditures from the TEL limit it
becomes less effective both in constraining govern-
ment and in stabilizing the government budget over
the business cycle. A broader base also limits the
economic distortions introduced by such privilege
seeking.
It is also fair to say that the use of actual historical
measures of revenue and expenditures has proven
more effective than the use of projected measures.
Historical data from the most recent budget cycle is
easily obtained and does not rely upon projections
of revenue or expenditures that are subject to error
and bias.
C. Rules Linking the TEL to a Budget Stabilization
Fund
The basic principle of a rules based budget stabili-
zation fund is straightforward. A good analogy is a
hybrid energy vehicle (HEV). An HEV has a brak-
ing system such that surplus energy created by the
motor when brakes are applied is stored in a battery,
and then used to power the motor when the car is
operating at a slower speed.
Rules governing a budget stabilization fund operate
much like an HEV. A brake is applied to limit the
amount of revenue the state spends in periods of
rapid economic growth. The surplus revenue is accu-
mulated in a budget stabilization fund, and used to
offset revenue shortfalls in periods of recession. The
rules governing how money is transferred into and
out of the budget stabilization fund are extremely
important because they determine the tradeoff
between constraining the growth of government and
stabilizing the budget over the business cycle.
At this point we assume that the budget stabilization
fund is clearly distinguished from other funds that
might be created. The money set aside in the budget
stabilization fund is used for only one purpose and
that is to stabilize the budget over the business cycle.
The TEL limit is held constant whenever there is a
revenue shortfall, and becomes a binding constraint
only when revenue recovers to that limit.
D. Rules for Allocating Surplus Revenue Into the
Budget Stabilization Fund
If we assume that an effective TEL is in place, then
the opportunity cost of setting aside surplus revenue
above the TEL limit in a budget stabilization fund
is the return of that surplus revenue to taxpayers
through tax rebates and tax cuts. The more of the
surplus revenue returned to taxpayers the lower the
rate of growth of government relative to the private
sector in the long run. Allocating some of that reve-
nue to a budget stabilization fund provides the funds
to stabilize the budget, but also reduces the
constraint imposed by the TEL on the growth of
government.

Rules must establish how much of the surplus rev-

enue to allocate to the budget stabilization fund at a
given point in time; and what, if any, cap should be
placed on the size of the budget stabilization fund.
Wall street and bond rating agencies often suggest
an appropriate size for a budget stabilization fund in
the range of 6 to 7 percent of the state budget. But,
each state is unique in its preferences and require-
ments for a budget stabilization fund, and it is fair to
say that there are no hard and fast rules..

E. Rules for Allocating Money from the Budget

Stabilization Fund to the General Fund

A rules-based budget stabilization fund would

require the allocation of money from the budget sta-
bilization fund to the general fund whenever there is
a revenue shortfall. These rules are also important
because they determine the tradeoff between con-
straining the budget over the long run, and stabiliz-
ing the budget over the business cycle.

If the primary emphasis is on budget stabilization

then money would be transferred equal to the rev-
enue shortfall until all of the funds in the budget
stabilization fund are exhausted. If the emphasis is
on constraining the growth of government in the
long run, then only a portion of the budget stabiliza-
tion fund would be transferred into the general fund
at a given point in time. In the latter case a revenue
shortfall would also require reductions in govern-
ment spending.

Voter surveys suggest that money should be trans-

ferred from the budget stabilization fund to offset
some, but not all, of the revenue shortfall. For
example, the rule might require that only half of
the revenue shortfall be offset by money transferred
from the budget stabilization fund in any given fiscal
year, with the other half offset by budget cuts. Such
a decision rule might mean that all of the budget
stabilization fund would not be exhausted in any
given recession to offset revenue shortfalls.
APPENDIX: THE NEXT GENERATION OF TELS - A MODEL TEL

The author has been consulting with a number of states on legislation to introduce, or modify, TELs along

the lines of the previous discussion of the next generation of TELs.14 The legislation proposing a new TEL

for Kansas is included here as an appendix, because it is the most carefully crafted TEL embodying these

principles.15

WORKING DRAFT NO. 5

December 22, 2003

3rs1247

DRAFT CONCURRENT RESOLUTION NO. ____

By

A PROPOSITION to amend the constitution of the state of Kansas by adding a new article thereto, prescrib-

ing certain limits upon taxes, revenues and expenditures by the state and local governments.

Be it resolved by the Legislature of the State of Kansas, two-thirds of the members elected (or appointed) and

qualified to the House of Representatives and two-thirds of the members elected (or appointed) and qualified to

the Senate concurring therein:

Section

1 . The following proposition to amend the constitution of the state of Kansas shall be submitted to

the qualified electors of the state for their approval or rejection: The constitution of the state of Kansas is

amended by adding a new article thereto to read as follows:

”Article16.

TAX, REVENUE AND EXPENDITURE LIMITATIONS ON STATE AND LOCAL GOVERNMENTS.

 ”

1. Definitions. As used within this article:

(a) ”State” means the state government including all branches, state offices, authorities,

agencies, boards, commissions, institutions, instrumentalities and any division or unit of state government

which are directly supported with tax funds, except that ”state” does not include any enterprise;

(b) ”local government” means any county, township, city, education district, other special

district and any other taxing district or political subdivision of Kansas which is directly supported by tax funds,

except that ”local government” does not include any enterprise;

(c) ”enterprise” means a state-owned or local government-owned business authorized to

issue its own revenue bonds and receiving less than 10% of annual revenue in grants or other direct cash ben-

efit from the state and local governments combined;

(d) ”bond” means any bond, note, debenture, interim certificate, grant and revenue antici-

pation note, lease-purchase agreement, lease certificate of participation or other evidence of indebtedness

which, in any such case, is entered into or establishes a debt obligation for longer than one fiscal year, wheth-

er or not the interest on which is subject to federal income taxation;

(e) ”fiscal year” means the twelve-month fiscal period prescribed by law for the state or the

local government;

(f) ”fiscal year spending” means all expenditures and reserve increases except, as to both,

expenditures for refunds of any kind or expenditures of moneys received from the federal government, mon-

eys received as grants, gifts or donations which are to be expended for purposes specified by the donor, mon-

eys that are collections for another government, moneys received for pension contributions by employees and

pension fund earnings, reserve transfers or expenditures;

(g) ”inflation” means the change expressed as a percentage in the consumer price index

for the Kansas City metropolitan area, all goods, all urban consumers, as officially reported by the bureau of
labor statistics of the United States department of labor, or its successor index; and

(h) ”population” means the more recent of either the periodic census conducted by the

United States department of commerce or its successor agency or the annual update of such census as pre-

scribed by the legislature by law, which shall be adjusted every decade to match the federal decennial census.

(i) ”education district” means each school district, vocational or technical school, commu-

nity college, technical college, municipal university, and any other public educational entity established as

provided by law, except that ”education district” does not include any state educational institution under the

control and supervision of the state board of regents.

(j) ”total state revenue” means all moneys received by the state from any source except any

of the following:

(1) Moneys received as grants, gifts or donations which are to be expended for purposes

specified by the donor;

(2) moneys received from the federal government; and

(3) moneys which are income earned on moneys in permanent endowment funds, trust

funds, deferred compensation funds or pension funds and which are credited to such funds;

(k) ”total local government revenue” means all moneys received by the local government

from any source except any of the following:

(1) Moneys received as grants, gifts or donations which are to be expended for purposes

specified by the donor;

(2) moneys received from the federal government; and

(3) moneys which are income earned on moneys in permanent endowment funds, trust

funds, deferred compensation funds or pension funds and which are credited to such funds.
 § 2. Prior Elector Approval for Tax Increases or Issuance of Certain Bonds. (a) For any fiscal

year that commences on or after July 1, 2005, the state must have approval of the electors in advance (1) for

any new state income, sales or other excise tax rate increase before the state tax rate increase can take effect,

(2) for any state mill levy ad valorem property tax rate increase above the state mill levy ad valorem property

tax rate for the prior year before the state mill levy ad valorem property tax rate increase can take effect, (3)

for any extension of any expiring state income, sales or other excise tax or expiring state ad valorem property

tax before the extension can take effect, or (4) for any state tax policy change enacted into law by the state

which would directly cause a net tax revenue gain to the state or local government, before such tax policy

change can take effect.

(b) For any fiscal year that commences on or after July 1, 2005, each local government must

have approval of the electors in advance (1) for any new local government income, sales or other excise tax

rate increase, which is authorized by law, before the local government tax rate increase can take effect, (2)

for any local government mill levy ad valorem property tax rate increase, which is authorized by law, before

the local government mill levy ad valorem property tax rate increase can take effect, (3) for any extension of

any expiring local government income, sales or other excise tax or local government ad valorem property tax,

which is authorized by law, before the extension can take effect, or (4) for any local government tax policy

change authorized by law and adopted in a resolution or ordinance by a local government which would direct-

ly cause a net tax revenue gain to the local government, before such tax policy change can take effect.

(c) For any fiscal year that commences on or after July 1, 2005, the state and each local

government must have approval of the electors before authorizing any bonds, except for refinancing existing

bonded debt at a lower interest rate.

(d) The legislature shall provide by law for the manner of submitting matters subject to

approval under this section to the electors.

§ 3. Spending and Revenue Limits. (a) For any state fiscal year that commences on or after

July 1, 2005, fiscal year spending by the state shall not increase above the fiscal year spending for the preced-

ing state fiscal year by more than the maximum percentage increase determined pursuant to this section.

The maximum percentage increase in fiscal year spending for a state fiscal year shall be equal to the result
obtained by adding the rate of inflation for the calendar year ending during the preceding state fiscal year,

plus the percentage change in state population during the calendar year ending during the preceding state

fiscal year if a positive number, adjusted for revenue changes approved by electors under section 2 of this

article.

(b) If the amount of the total state revenue for the preceding state fiscal year exceeds the

amount of total state revenue for the second preceding state fiscal year, the total state revenue limitation for

a state fiscal year shall be the result obtained by adding (1) the lesser of (A) the amount of total state revenue

for the preceding state fiscal year or (B) the amount of the total state revenue limitation for the preceding

state fiscal year, and (2) the product of (A) the amount determined under clause (1) of this subsection, and

(B) the sum of (i) the rate of inflation for the calendar year ending during the preceding state fiscal year, plus

(ii) the percentage change in state population during the calendar year ending during the preceding state fis-

cal year if a positive number.

(c) If the amount of the total state revenue for the preceding state fiscal year is less than the

amount of total state revenue for the second preceding state fiscal year, the amount of the total state revenue

limitation for a state fiscal year shall be the lesser of (1) the amount of total state revenue for such state fiscal

year, or (2) the amount of the total state revenue limitation for the most recent state fiscal year for which the

amount of total state revenue exceeded the amount of total state revenue for the preceding state fiscal year.

(d) For any local government, other than an education district, for any local government fis-

cal year that commences on or after July 1, 2005, fiscal year spending by the local government, other than an

education district, shall not increase above the fiscal year spending for the preceding local government fiscal

year by more than the maximum percentage increase determined pursuant to this section. For any fiscal year

that commences on or after July 1, 2005, the maximum percentage increase in fiscal year spending by a local

government, other than an education district, equals the sum of inflation during the preceding calendar year

plus the percentage change in the local government population during the preceding calendar year if a posi-

tive number, adjusted for revenue changes approved by the electors under section 2 of this article.

(e) For any education district fiscal year that commences on or after July 1, 2005, fiscal year

spending by the education district shall not increase above the fiscal year spending for the preceding educa-

tion district fiscal year by more than the maximum percentage increase determined pursuant to this section.
For any fiscal year that commences on or after July 1, 2005, the maximum percentage increase in fiscal year

spending by an education district equals inflation during the preceding calendar year, plus the percentage

change in its pupil or student enrollment for the school year commencing during the preceding calendar year

as compared to the school year preceding that school year if a positive number, adjusted for revenue changes

approved by the electors under section 2 of this article.

(f) If the amount of the total local government revenue for the preceding local government

fiscal year exceeds the amount of total local government revenue for the second preceding local government

fiscal year, the total local government revenue limitation for a local government fiscal year shall be the result

obtained by adding (1) the lesser of (A) the amount of total local government revenue for the preceding local

government fiscal year or (B) the amount of the total local government revenue limitation for the preced-

ing local government fiscal year, and (2) the product of (A) the amount determined under clause (1) of this

subsection, and (B) the sum of (i) the rate of inflation for the calendar year ending during the preceding local

government fiscal year, plus (ii) in the case of a local government other than an education district, the per-

centage change in local government population during the calendar year ending during the preceding local

government fiscal year if a positive number, or (iii) in the case of an education district, the percentage change

in its pupil or student enrollment for the school year commencing during the preceding calendar year as com-

pared to the school year preceding that school year if a positive number.

(g) If the amount of the total local government revenue for the preceding local government

fiscal year is less than the amount of total local government revenue for the second preceding local govern-

ment fiscal year, the amount of the total local government revenue limitation for a local government fiscal

year shall be the lesser of (1) the amount of total local government revenue for such local government fiscal

year, or (2) the amount of the total local government revenue limitation for the most recent local government

fiscal year for which the amount of total local government revenue exceeded the amount of total local gov-

ernment revenue for the preceding local government fiscal year.

(h) The legislature, by law, shall provide a mechanism to adjust the amount of a limitation

under this section to reflect any subsequent transfer of all or any part of the cost of providing a governmen-

tal function. The mechanism shall adjust the amount of a limitation so that total costs are not increased as a

result of the transfer. The adjustment mechanism provided for in this subsection shall be used in determining

a limitation under this section beginning with the fiscal year immediately following the transfer.
 (i) The legislature, by law, shall provide a mechanism to adjust the amount of a limitation

under this section to reflect the cost of providing a governmental function on account of any subsequent

annexation, creation of a new governmental unit, or any consolidation or change in the boundaries of a gov-

ernmental unit. The mechanism shall adjust the amount of limitation so that total costs are not increased as

a result of the annexation, creation, consolidation or change in boundaries. The adjustment mechanism pro-

vided in accordance with this subsection shall be used in determining a limitation under this section beginning

with the fiscal year immediately following the annexation, creation of a new governmental unit, or consolida-

tion or change in the boundaries of a governmental unit.

(j) In the case of the state or any local government having a fiscal year ending on June 30,

2005, for the purposes of determining total revenue limitations under this section for the state or any such

local government, the total authorized fiscal year expenditures for the fiscal year ending on June 30, 2004,

shall be construed to be the total revenue limitation for that preceding fiscal year and the total authorized

fiscal year expenditures for the fiscal year ending on June 30, 2005, shall be construed to be the total revenue

limitation for that preceding fiscal year. In the case of any local government having a fiscal year ending on

December 31, 2005, for the purposes of determining total local government revenue limitations under this

section for any such local government, the total authorized fiscal year expenditures for the fiscal year ending

on December 31, 2004, shall be construed to be the total revenue limitation for that preceding fiscal year and

the total authorized fiscal year expenditures for the fiscal year ending December 31, 2005, shall be construed

to be the total revenue limitation for that preceding fiscal year.

§ 4. Emergency Reserve Funds. (a) For any state fiscal year that commences on or after July

1, 2005, if revenue from sources not excluded from total state revenue exceeds the total state revenue limita-

tion for that state fiscal year and subject to the other provisions of this section, a portion of total state rev-

enue in excess of the total state revenue limitation, determined in accordance with section 3 of this article,

shall be transferred in the amount and in the manner prescribed by the legislature by law to the emergency

reserve fund, which fund is hereby created in the state treasury, to the extent necessary to ensure that a bal-

ance of the emergency reserve fund at the end of the state fiscal year is an amount equal to not more than

3% of the total state revenue limitation for the ensuing state fiscal year. Any amount required to be main-

tained in the ending balance of the state general fund as provided by law shall be excluded from the amount

available for transfer to the emergency reserve fund of the state by this section. Each transfer to the emergen-
cy reserve fund of the state prescribed by this section shall be made before making any transfer to the budget

stabilization reserve fund as provided in section 5 of this article or any refunds as required by section 6 of this

article. The state shall not be required to transfer any moneys other than any amount of total state revenue

in excess of the total state revenue limitation to the emergency reserve fund. The moneys in the emergency

reserve fund shall be in addition to, and shall not be used to meet, any other reserve requirement under this

constitution or any law. In no case shall additional moneys be transferred to the emergency reserve fund if

the balance in the emergency reserve fund is more than 3% of the total state revenue limitation for the ensu-

ing state fiscal year.

(b) Moneys in the emergency reserve fund of the state may be expended only for emer-

gencies declared by law. Two-thirds (2/3) of the members then elected (or appointed) and qualified in each

house, voting in the affirmative, shall be necessary to declare an emergency within the state of Kansas as

a whole and to pass any bill making an appropriation of money from the emergency reserve fund. Income

earned on the emergency reserve fund of the state shall accrue to the fund.

(c) For each local government fiscal year that commences on or after July 1, 2005, each

local government shall reserve and maintain in an emergency reserve fund an amount equal to not more than

3% of its total local government revenue limitation for the ensuing local government fiscal year in accor-

dance with this section. For any local government fiscal year that commences on or after July 1, 2005, if total

local government revenue from sources not excluded from total local government revenue exceeds the total

local government revenue limitation for that local government fiscal year and subject to the other provisions

of this section, a portion of total local government revenue in excess of the total local government revenue

limitation, determined in accordance with section 3 of this article, shall be transferred in the amount and in

the manner prescribed by the legislature by law to the emergency reserve fund of the local government. Any

amount required to be maintained in the ending balance of the general fund of the local government as pro-

vided by law shall be excluded from the amount available for transfer to the emergency reserve fund of the

local government by this section.

(d) Moneys in the emergency reserve fund of a local government may be expended only for

emergencies within a local government declared by the local government in the manner prescribed by law.

Income earned on the emergency reserve fund of the local government shall accrue to the fund.
 (e) As used in this section ”emergency” means an extraordinary event or occurrence that

could not have been reasonably foreseen or prevented and that requires immediate expenditures to preserve

the health, safety and general welfare of the people within a local government or the state and ”emergency”

does not mean a revenue shortfall or budget shortfall.

§ 5. Budget Stabilization Reserve Funds. (a) For any state fiscal year that commences on or

after July 1, 2005, if total state revenue exceeds the total state revenue limitation for that state fiscal year,

then the remaining excess amount, after making any transfer to the emergency reserve fund as required by

section 4 of this article, shall be reserved as prescribed by this section or refunded as prescribed by section

6 of this article, subject to the other provisions of this section. Any amount required to be maintained in the

ending balance of the state general fund as provided by law shall be excluded from the amount available for

transfer to the budget stabilization reserve fund of the state by this section.

(b) After any amount required to be transferred to the emergency reserve fund of the state

pursuant to section 4 of this article has been transferred, an amount of any remaining excess amount of total

state revenue shall be transferred in the amount and in the manner prescribed by the legislature by law to the

budget stabilization reserve fund, which fund is hereby created in the state treasury. The amount transferred

to the budget stabilization reserve fund in accordance with this subsection shall be equal to the lesser of (1)

the amount necessary to ensure that the balance in the budget stabilization reserve fund at the end of the

state fiscal year is an amount equal to 10% of the total state revenue limitation for the ensuing state fiscal

year, or (2) the amount equal to 50% of any such remaining excess amount of total state revenue. Income

earned on the budget stabilization reserve fund shall accrue to the fund. In no case shall additional moneys

be transferred into the budget stabilization reserve fund if the balance in the fund is equal to or more than

10% of the total state revenue limitation for the ensuing state fiscal year.

(c) For any state fiscal year that commences on or after July 1, 2005, if the amount of the

total state revenue is less than the amount of total state revenue for the prior state fiscal year, the legislature

shall provide by law for the transfer of moneys from the budget stabilization fund to the state general fund

in an amount equal to not more than the difference between the amount of total state revenue for the prior

state fiscal year and the amount of total state revenue for the state fiscal year. Under no other circumstances

shall moneys be transferred or expended from the budget stabilization fund of the state.
 (d) For each local government fiscal year that commences on or after July 1, 2005, each

local government shall reserve and maintain in a budget stabilization reserve fund an amount equal to not

more than 10% of its fiscal year estimated spending in accordance with this section. For any local govern-

ment fiscal year that commences on or after July 1, 2005, if total local government revenue from sources not

excluded from total local government revenue exceeds the total local government revenue limitation for that

local government fiscal year and subject to the other provisions of this section, a portion of total local govern-

ment revenue in excess of the total local government revenue limitation, determined in accordance with sec-

tion 3 of this article, shall be transferred in the amount and in the manner prescribed by the legislature by law

to the budget stabilization reserve fund of the local government. Any amount required to be maintained in

the ending balance of the general fund of the local government as provided by law shall be excluded from the

amount available for transfer to the budget stabilization reserve fund of the local government by this section.

No amount shall be transferred to the budget stabilization reserve fund of a local government until after any

amount required to be transferred to the emergency reserve fund of the local government pursuant to section

4 of this article has been transferred.

(e) For any current local government fiscal year that commences on or after July 1, 2005, if

the amount of the total local government revenue is less than the amount of total revenue for the prior fiscal

year, the local government shall provide for the transfer of moneys from the budget stabilization fund to the

general revenue fund of the local government in an amount equal to not more than the difference between

the amount of total local government revenue for the prior local government fiscal year and the amount of

total revenue for the current local government fiscal year. Under no other circumstances shall moneys be

transferred or expended from the budget stabilization fund of the local government.

§ 6. Disposition of Excess Revenues. (a) Any excess amount of total state revenues for a state

fiscal year that remains after the transfers to the emergency reserve fund and budget stabilization reserve

fund pursuant to section 4 or section 5 of this article, if any, shall be reserved in the current state fiscal year

and shall be refunded as provided by law during the next ensuing state fiscal year to the taxpayers who paid

the state ad valorem property taxes or state income, sales or other excise taxes for or during the preceding

state fiscal year, in a manner that is proportional, on a pro rata basis, to the manner in which such taxes were

collected from such taxpayers. Any amount required to be maintained in the ending balance of the state gen-

eral fund as provided by law shall be excluded from the amount available to be reserved and refunded by the

state as prescribed by this section.

 (b) Any excess amount of local government revenues for a local government fiscal year that

remains after transfers to the emergency reserve fund and budget stabilization reserve fund of the local gov-

ernment pursuant to section 4 or section 5 of this article, if any, shall be reserved in the current local govern-

ment fiscal year and shall be refunded during the next ensuing local government fiscal year to the taxpayers

who paid the ad valorem property taxes or income, sales or other excise taxes of the local government for or

during the preceding local government fiscal year, in a manner that is proportional, on a pro rata basis, to the

manner in which such taxes were collected from such taxpayers. Any amount required to be maintained in

the ending balance of the general fund of the local government as provided by law shall be excluded from the

amount available to be reserved and refunded to taxpayers by the local government as prescribed by this sec-

tion.

(c) In a case of any amount that is received pursuant to any tax and required to be reserved

and refunded to taxpayers by the state or a local government pursuant to this section and that is determined

by the state or local government in the manner prescribed by law to be insufficient for refunds to be made

during the ensuing state or local government fiscal year, as the case may be, such amount shall be reserved

for refunds to be made thereafter when the amount reserved is sufficient therefor.

§ 7. State Temporary Borrowing. On or after July 1, 2005, during any state fiscal year, trans-

fers which are temporary and are to be repaid, or any other temporary borrowing, through certificates of

indebtedness or any other device or manner, of any moneys in the state treasury to be credited to the state

general fund, are prohibited unless the moneys so transferred or otherwise borrowed are restored or repaid

to the original funds or accounts of the state treasury from the state general fund within the same state fiscal

year. The provisions of this section do not apply to transfers from the emergency reserve fund or the budget

stabilization reserve fund to the state general fund in accordance with this article.

§ 8. General Revenue Supplanting. (a) On or after July 1, 2005, any appropriation of moneys

in the state treasury that either supplants any appropriation from the state general fund, or that, if not made,

would require an appropriation from the state general fund is prohibited. For purposes of this subsection,

any appropriation of moneys in the state treasury that is funded by user charges or fees imposed on goods or

services that do not exceed the cost of the goods or services provided shall not be deemed to be an appropria-

tion that supplants any appropriation from the state general fund.
 (b) For any local government fiscal year that commences on or after July 1, 2005, no local

government shall impose or shall increase user charges or fees imposed for goods or services provided by the

local government to supplant general revenues of the local government. For the purposes of this subsection,

any imposition or increase of user charges or fees imposed on goods or services that do not exceed the cost

of the goods or services provided shall not be deemed to be supplanting general revenues of the local govern-

ment.

§ 9. State Mandates on Local Governments. A local government may not be required to fulfill

any mandate imposed by the state unless and until, and may be required to fulfill that mandate only to the

extent that, funds are provided to the local government by the state for that purpose. The legislature is not

required to appropriate funds for mandates if more than two years have passed since the effective date of the

mandate and no claim for funding has been made by local government during that period.

§ 10. Construction and Enforcement. (a) The provisions of this article shall be liberally con-

strued for the purpose of effectuating the purposes thereof, except that nothing in this article shall be con-

strued to authorize any new or increased tax of any kind other than as provided or authorized by law enacted

by the legislature in accordance with and subject to the other provisions of this constitution.

(b) In any case of a conflict between any provision of this article and any other provision

contained in the constitution, the provisions of this article shall control.

(c) All laws in force at the time of the adoption of this amendment and consistent therewith

shall remain in full force and effect until amended or repealed by the legislature. The legislature shall repeal

or amend all laws inconsistent with the provisions of this article to conform with the provisions of this article.

(d) Any individual or class of individuals shall have standing to bring a suit to enforce this

article. A court of record shall award a successful plaintiff costs and reasonable attorney fees in the suit, but

may not allow the state or a local government to recover costs and reasonable attorney fees unless a suit

against it is ruled frivolous.”

Sec. . The following statement shall be printed on the ballot with the amendment as a whole:
 ”Explanatory statement. This amendment would establish requirements for prior voter

approval of tax increases and certain bond issuances by the state and local governments, would place limita-

tions on increases in state and local government spending and provide for the disposition of excess state rev-

enues by establishing certain reserve funds and prescribing certain tax refunds by the state.

”A vote for this proposition would . . .

I.

”A vote against this proposition would . . .” Sec. . This resolution, if approved

by two-thirds of the members elected (or appointed) and qualified to the House of Representatives, and

two-thirds of the members elected (or appointed) and qualified to the Senate shall be entered on the jour-

nals, together with the yeas and nays. The secretary of state shall cause this resolution to be published as

provided by law and shall cause the proposed amendment to be submitted to the electors of the state at the

general election to be held on November 2, 2004, unless a special election is called at a sooner date by con-

current resolution of the legislature, in which case it shall be submitted to the electors of the state at the spe-

cial election.
BIBLIOGRAPHY
Abrams, B.A. and W. R. Dougan (1986). “The
Effects of Constitutional Restraints on Government
Spending.” Public Choice 49:223-38.
Bails, Dale G. (1982). “A Critique on the
Effectiveness of Tax-Expenditure Limitations.”
Public Choice 38:129-138.
Bails, Dale G. (1990). “The Effectiveness of
Tax-Expenditure Limitations: A Reevaluation.”
American Journal of Economics and Sociology 49:
223-38.
Bails, Dale G. and Margie A. Tieslau (2000). “The
Impact of Fiscal Constitutions on State and Local
Expenditures.” Cato Journal 20:255-277.
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ENDNOTES
1
The author has been consulting with these states as a member Copyright ©2004, Independence Institute
of the American Legislative Exchange Council (ALEC) Task Force
on Tax and Fiscal Policy.
2
For a discussion of the political economy of TELs see (Broder INDEPENDENCE INSTITUTE is a non-profit,
2000).
3
For an introduction to this literature see (Buchanan and
non-partisan Colorado think tank. It is governed
Wagner 1977) by a statewide board of trustees and holds a
4
For a discussion of the relevance of rent seeking models to
501(c)(3) tax exemption from the IRS. Its public
TELs see (Poulson and Kaplan 1994).
5
The discussion in this case study is from (Uhler and Poulson policy research focuses on economic growth, educa-
2003) and (New 2001). tion reform, local government effectiveness, and
6
The discussion of this case study draws from (Stansel 1994),
(Public Interest Institute 2002), and (McCarty 2003). Constitutional rights.
7
The discussion of this case study draws on (Holcombe 2001).
8
The discussion of this case study draws on (New 2001) and
(New 2003). JON CALDARA is President of the Institute.
9
The discussion of this case study draws on (Public Interest
Institute 2002) and (Poulson 2002).
10
The discussion of this case study draws on (Poulson 2001), DAVID KOPEL is Research Director of the
(Poulson 2003a), (Poulson 2003b), and (Poulson 2003c). Institute.
11
For insight into this controversy see (Treasurer’s Advisory
Group on Constitutional Amendments 2003).
12
Much of this discussion is drawn from (Poulson 2003d) BARRY POULSON is a Senior Fellow at the
13
The author has been consulting with these states as a mem-
ber of the American Legislative Exchange Council (ALEC) Task
Independence Institute and a professor of economics
Force on Tax and Fiscal Policy. at the University of Colorado.
14
Ibid.
15
This Amendment has been introduced in the Kansas
Legislature by Representative Brenda Landwehr. ADDITIONAL RESOURCES on this subject can
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