Tax and Expenditure Limitations: What Arizona Can Learn from Other States

Posted on April 21, 2003 | Type: Policy Report
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EXECUTIVE SUMMARY

Excess spending, not a revenue shortage, has created Arizona's mounting budget shortfall. During the 1990s, the legislature spent two of every three dollars in new revenue, and sent only one dollar in new revenue back to taxpayers. In fact, general fund spending doubled between 1990 and 2000.

How can spending growth be controlled? In the past 25 years, Arizona voters passed three fiscal limitations: an expenditure limit, property tax limits, and a supermajority requirement for tax increases. None of those limitations has limited spending effectively.

Experiences in other states suggest strategies for reducing budgetary growth. The results of a regression analysis on budget data from 1972 to 1996 demonstrate that limiting increases in expenditures to the rate of population growth plus inflation reduces per capita state and local expenditures by $115 a year. If the limit includes a taxpayer refund provision but does not cap expenditure growth at population growth plus inflation, the limit reduces state and local expenditures by $40 a year per capita. If a state has neither provision, its expenditures increase by $15 a year per capita.

The most effective limit is Colorado's Taxpayer Bill of Rights, passed in 1992. The amendment caps spending growth at the rate of population growth plus inflation and requires immediate refund of surplus revenues to taxpayers. The result is that Colorado taxpayers have received $3.2 billion in tax rebates since 1997, an average of $900 per taxpayer. At the same time, Colorado's economy has been exceptionally strong. Between 1995 and 2000, Colorado ranked first among all states in gross state product growth and second in personal income growth.

Had Arizona enacted an expenditure limit identical to Colorado's Taxpayer Bill of Rights in 1992, it would have avoided the fiscal crisis of the past two years and taxpayers would have received $4 billion in refunds. Policymakers and voters in Arizona should consider adopting a constitutional amendment modeled on the Colorado initiative. Such an amendment is Arizona's best hope to restrain spending, generate tax relief, and prevent future fiscal crises.

Read Tax and Expenditure Limitations here.

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