Feb. 6 (Bloomberg) -- Good times fill public coffers with new revenue, at least some of it unanticipated. Seeing the windfall, U.S. state legislatures usually proceed to spend it. After all, that’s what politicians love to do. And so governments grow bigger and bigger.
In his State of the State address last week, Republican Governor Rick Perry of Texas proposed breaking this cycle. He wants Texas to return unspent money to the taxpayers.
“When we do bring in more than we need,” he said, “we’ll have the option of returning tax money directly to the people who paid it.” Simple enough; yet in Texas, such an arrangement would require a long, difficult slog through the process of amending the state constitution.
Give Perry credit for recognizing a plain fact that too many politicians ignore: The money we earn belongs to us, not the government. Rebate plans, however, have the same fatal flaw as requirements to balance budgets -- they don’t impose enough restraint on the size of government. Governments cut spending only when tax revenue falls.
Take Texas, for example. Balanced budgets are mandated; even so, spending rose from $23 billion in 1990 to $96 billion in 2011, a 300 percent increase. Adjust for inflation and population growth, and Texas’s state-spending increase still totals more than 100 percent.
And this under Republican governors and legislators.
As the legislature convened this year, the state comptroller’s office reported that Texas enters the next two-year budget cycle with a surplus of $8.8 billion, a bonus from a growing economy and energy boom. Lawmakers are chin-deep in proposals on how to spend it, which tells you why Perry is floating his tax-rebate plan right now.
Even with a requirement to rebate excess tax revenue, state politicians can spend as much as they like, subject to the obligation to raise enough revenue to avoid deficits. Every once in a while, they will miscalculate and end up sending some cash back to where it came from. The incentive will be for politicians to shoot for spending at levels that ensure rebates will be as rare and small as possible.
Occasional tax-revenue rebates don’t alter the basic calculus that leads to higher spending and bigger government. Interest groups will continue to advocate for spending that benefits them a great deal, financed by general taxes. They gain a lot and pay a little. In contrast, rebates are likely to be small for most individual taxpayers, giving them very little incentive to lobby for reduced spending.
Politicians know how to play this game. They will continue to seek votes and campaign cash by delivering the concentrated benefits to interest groups, such as employee unions or advocates of alternative energy. Holding out the possibility of tax rebates sometime in the future won’t be a winning campaign strategy.
The spending cycle will roll on. If tax revenue rises in good times, politicians will still spend more, perhaps not in the first budget cycle but in the next one. So the rebate plan won’t put a cap on spending or the size of government.
At the same time, future rebates don’t lessen the burdens that taxes impose on work and the economy. Individuals and companies will still pay the piper this year, with no clue about whether they can plan on a rebate next year. And there is the messy issue of redistribution. How do we know the rebates will go into the pockets of those who paid taxes, dollar for dollar? If it is a political decision, some Texans will, no doubt, vote to gain at the expense of others.
Amending constitutions is hard work. In Texas, it takes a two-thirds vote of both houses of the legislature, plus approval in a statewide referendum. If he’s going to invest all that time, energy and political capital, Perry ought to shoot for a broader constitutional provision that will impose genuine constraint on the size of government.
A formula might tie public spending to growth in population, personal income or gross state product, or maybe some combination. Better yet, maybe spending should grow at some percentage of the increases, so it will be shrinking as a share of the state economy. Because balanced budgets tie spending to revenue, constitutional caps on taxes might accomplish the same ends.
Economists could recommend the type of limit and its level. The goal should be spending levels that promote economic growth and keep Texas as an attractive place for migrants from other states.
Recessions would be tough, but that’s how it is already. In good years, extra revenue would flow into the state’s coffers, but with a crucial difference. Politicians would be barred from spending it. It would be best to put that money into a rainy-day fund to ease the blow of hard times. But Texas could give it back to the taxpayers, just as Perry wants.
Constitutional limits on spending blunt the political incentives to spend more. They’re the only long-term way to restrain the size of government.
(W. Michael Cox is director of the O’Neil Center for Global Markets and Freedom at Southern Methodist University’s Cox School of Business. Richard Alm is a writer-in-residence at the center. The opinions expressed are their own.)
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