One of the biggest surprises on election night here in Massachusetts was the strong showing of Question 1, which proposed abolishing the state income tax. Falling less than five percentage points short of a majority, the strong showing for Question 1 will likely inspire libertarians to sponsor a similar anti-tax initiative in 2004. While it's good to see tax reformers using the initiative process, it is unfortunate that they are falling into many of the same strategic pitfalls that their predecessors did 25 years ago. After all, evidence indicates that legislatures often respond to these narrow tax limitations by raising other, less visible taxes to compensate for the revenue shortfall.
A textbook example of this phenomena occurred after the passage of Proposition 13 in California. Proposition 13 did an outstanding job at providing needed short-term tax relief for homeowners. Unfortunately, however, since expenditures were not restrained, spending continued to rise and other taxes were increased. For instance, in the years following the passage of Proposition 13, California raised the income tax, the sales tax, and taxes on beer, wine, and cigarettes. During the early 1990s, Governor Pete Wilson even proposed increasing taxes on snacks. This vicious cycle of spending and taxing is the root cause of California's current fiscal mess.
However, the past decade has demonstrated that there exist better strategies for limiting the size of government. In fact, broader limitations on total expenditures and total revenues have been quietly enjoying a great deal of success in recent years. The best example of such a limit is Colorado's Taxpayer Bill of Rights (TABOR), which was passed by a citizen initiative in 1992.
TABOR possesses two features that have generated a great deal of tax relief for Colorado residents. First, TABOR places a tight cap on all state expenditures, limiting increases in per capita state expenditures to the inflation rate. Second, it mandates immediate refunds of all surplus revenues. As a result, when the state collects revenues above the limit set by TABOR, Colorado taxpayers are entitled to a rebate. Overall, between 1997 and 2002, Colorado has reduced taxes more than any other state, issuing annual tax rebates that have totaled more than $3.2 billion.
These tax reductions have been a boon to Colorado's local economy. Between 1995 and 2000, for instance, Colorado ranked first among all states in gross state product growth and second in personal income growth. Furthermore, according to the National Association of State Budget Officers (NASBO), Colorado was one of only five states that did not run a deficit during fiscal 2002.
In addition to fostering economic growth, TABOR has also forced Colorado residents to see the costs inherent in government programs. In other states, residents often support higher government spending because they can see the benefits of a particular program, but remain blissfully unaware of the costs that they and other taxpayers will be forced to bear.
However, in Colorado the annual tax rebates brings these tradeoffs clearly into focus. In every year from 1993 to 1999 there was a proposal on the ballot to either raise taxes or increase spending in excess of the TABOR limit. Knowing these initiatives would markedly reduce the size of their annual tax rebate, voters soundly defeated each of these measures.
Furthermore, an approach similar to TABOR would likely enjoy more political success in Massachusetts than a proposal to abolish the state income tax. Reasonable people can disagree about the extent to which state services would have to be reduced if the income tax were abolished. However, such grandiose proposals are very easy for unions and other opponents to demonize and caricature. Conversely, a tight expenditure limit would not require drastic short-term budget cuts. Additionally, this approach has actually enjoyed some success in Massachusetts. In 1986 Massachusetts voters enacted an expenditure limit though it was too high to meaningfully constrain budgetary growth.
Now, all of this is not to say that narrow tax reductions are of no use. Indeed, both California's Proposition 13 and Massachusetts' Proposition 2 1/2 continue to be successful in limiting property taxes in their respective states. In fact, the strong showing for Question 1 will probably make Mitt Romney and the legislature more hesitant to propose tax increases in the future. Still, if Massachusetts' libertarians are serious about permanently limiting the size of government, they should consider proposing a broad spending limit modeled after Colorado's Taxpayer Bill of Rights.