Wisconsin Needs the Taxpayer Bill of Rights
Limit annual government spending increases:
• The state, school district, and technical school district spending growth will be limited to:
o The previous year’s spending, plus
o A percentage increase equal to growth in inflation, plus
o A percentage increase equal to the percentage increase in population
• County and Municipal spending growth will be limited to:
o The previous year’s spending, plus
o A percentage increase equal to growth in inflation, plus
o A percentage increase equal to the percentage increase in equalized value due to new construction
Why these measures?
Inflation, measured by the Consumer Price Index (CPI) is a measure of the pressures on the average person’s pocketbook. It’s a measure of the taxpayer’s ability to pay. CPI is a widely accepted measure of the growth of prices. It is used in calculating increases in pay, in pension and retirement benefits.
Population: the more people, the more services are necessary. If population grows 5%, services must also be extended by that amount.
New construction: this measure is closely tied to the property tax, which is the main source of revenue for counties and municipal governments. It is also a measure of growing need for services provided by local governments. Using this measure will provide an incentive for economic growth.
Referendums:
The Taxpayer Bill of Rights requires that a government receive permission from its citizens before:
• Spending more than the spending limits allow;
• Raising the rate of any tax;
• Entering into bonding, with the following exceptions:
o bonding for reasons of economic development;
o bonding when the debt service can be paid within the existing spending growth limit.
o bonding for less than one year (cash flow bonding)
The Budget Stabilization Fund:
The constitutional amendment will require that each government create and fill a budget stabilization fund, equal to a minimum of 4% of annual spending. Excess revenues – revenues received in excess of the spending growth limit – may be used to fill the budget stabilization fund, as an alternative to sending the money back to the taxpayers.
Money used to fund the Budget Stabilization Fund does not count toward the spending limit. Money spent from the Budget Stabilization Fund does count toward the limit. This will help offset revenue shortfalls which result in the “ratchet effect” (see attachment for more information).
Amendments:
AJR 55 is in the process of being amended in several ways. Most of those amendments are noted above already. They include:
• The current draft requires a referendum for any bonding – this will be amended as noted above;
• The current draft requires an emergency fund, which will be amended to draw from the budget stabilization fund when there is an emergency;
• The current draft does not allow governments to use excess revenues to fill the budget stabilization fund – this will be amended to match the above explanation.
Additional amendments will likely include:
• Allowing a government to use the prior year’s spending limit as the current year’s spending limit – this is a response to the “ratchet effect” which results in declining annual spending during economic slowdowns (see the attached explanation of the “ratchet effect”).
The Taxpayer Bill of Rights
Objection: TABOR doesn’t address the basic unfairness of Wisconsin’s tax system.
Answer: No, but it doesn’t stop us from doing that, either. TABOR simply limits how government can grow its spending: we can still change where the money comes from.
O: It doesn’t provide enough money for government
A: TABOR provides a reasonable amount of growth every year, based on people’s ability to pay. Those who believe it’s not enough have gotten much too used to spending increases, which grow faster than workers’ and retirees’ incomes.
O: If TABOR were law, what services would you cut to make up for less spending?
A: None. With TABOR, spending will grow every year.
O: We don’t need to amend the constitution to do this.
A: Constitutions are written to protect citizens from their government, not the government from its citizens. Anything less than a constitutional amendment will not bind the state – the state government can ignore its own statutes, simply by writing a single line “notwithstanding state statute…”
O: Why state and local?
A: Like it or not, state and local governments in Wisconsin are intertwined. Wisconsin sends more shared revenue to locals than most other states, and local governments are all creations of the state. If TABOR were to affect one, but not the other, it would create a loophole. Imagine government as a balloon: limit only the state, and the state will simply push spending onto local governments – you’re squeezing one part of the balloon, so all the air goes into the other part.
O: This will hurt education in Wisconsin.
A: More spending doesn’t mean better education. Since TABOR went into effect in Colorado, all of their academic measurements have improved, including test scores, spending per student (even considering CO was one of only 5 states with greater than 10% growth in number of students).
Last year, Wisconsin spent nearly $10,000 per student, and had one licensed teacher per 12.5 students1.
O: But hasn’t Colorado fallen to nearly last in the nation in per-student spending?
A: Colorado’s ranking has fallen, because their per-student spending hasn’t grown as fast as that in other states. Between 1993 and 2000, Colorado’s per-student spending grew 30.4% – just under Wisconsin, where per-student spending grew 30.67% over the same period2.
Remember, per-student spending is calculated by dividing total spending by the total number of students. From 1996 to 2001, Colorado had one of the fastest-growing student bodies in the nation. Their student body grew by over 10% during that time – one of only 5 states to do so3. Wisconsin’s student body shrank over the same period, yet Colorado still kept up with Wisconsin in per-student spending.
Colorado has also excelled academically. In 1998, Colorado ranked 9th nationally on the NAEP 4th grade reading tests, and 12th nationally on the 8th grade reading tests (again, right below Wisconsin, at 7th and 11th). In 2002, Colorado’s ACT composite score was 21.5 – ranking them 17th nationally, with 99% of their students taking the test. Wisconsin’s score was 22.2, ranking 5th, with 68% of students – those most likely to go on to college – taking the test4.
1. Wisconsin Department of Public Instruction, http://data.dpi.state.wi.us/data/selschool.asp
2. National Center for Education Statistics, Digest of Education Statistics 2002 , Elementary and Secondary Education Chapter (Chapter 2), page 158
3. ibid, page 6
4. American Legislative Exchange Council, Report Card on American Education: A State-by-State Analysis, 1976-2002.
O: Colorado had one of the worst deficits in the country last year because of TABOR.
A: According to Nancy McCallin, Colorado’s budget director, “TABOR has had no impact on the state’s budget situation during the past two years.” Every state has had budget problems during the recession, whether they had spending limits or not. Wisconsin had greater budget deficits that we have filled by bonding and selling tobacco settlement revenues. In fact, Colorado’s economy was hit harder than most, because of their dependency on technology, tourism, and airlines – three of the hardest hit industries – represent such a large portion of their economy.
O: “The ratchet effect” has hamstrung Colorado’s ability to support needed services.
A: The “ratchet effect” occurs when government revenues fall short of allowable spending. This causes next year’s spending base to be lower than the previous year’s spending (See the attachment on this subject for a more detailed explanation.)
Lasee-Wood TABOR will address this in two ways: first, it will require a budget stabilization fund, which will be funded through excess revenues. The budget stabilization fund will give government another revenue source, to use when revenues fall short.
Second, Wisconsin will allow the state and local governments to default to last year’s spending limit, if the current year’s limit is going to be lower. Thus, spending may remain flat at certain times, but will not decrease, as long as the revenues are available to maintain it.
O: It’s the job of the elected official to decide how much to spend. Voters elect their officials to make those decisions
A: Wisconsin’s tax and spending system is such that no level of government is ever wholly responsible for spending increases. The state taxes, then sends nearly 60% of those taxes back to local governments and school districts. The state also mandates that schools and locals provide certain services. Complain to the local, they say the state’s making us spend all this money. Complain to the state, we say look at all the money we give them – they’re doing more than they have to with the money the state gives them.
TABOR won’t eliminate the role of the elected official: there will still be decisions to be made on spending priorities: what do we spend on, and how much? What will we not spend on? In fact, those decisions will become even more important, when government can’t simply raise taxes to avoid tough spending decisions.
O: Voters won’t have the time to understand the issues they’re voting on fully.
A: But they have the time to pick the right person to represent them? Somehow, our elected officials believe that people are smart enough to elect them, but not smart enough to decide how much they are able to pay for their government.
O: In Colorado, certain mandatory services (Medicaid, corrections) have continued to grow at a rapid pace, which means others (the University system) have suffered an unfair amount of cuts.
A: This is the blame game, same as we play it here in Wisconsin. It’s not our fault we’re spending so much: the Feds are making us do it.
It’s true that federally mandated spending, particularly MA, takes up a large portion of Wisconsin’s budget. It’s also true that Wisconsin does a lot more than is required by those mandates. We can spend less, if we want to.
By promoting a healthier economy, we also promote job creation, which creates demand for qualified employees. This will have the effect of relieving pressure on our welfare system (including MA).
Nonetheless, it’s almost certainly true that some programs will be funded at greater levels than others. This isn’t new – we do that now. The difference will be, government will have to set priorities based on a limited increase in funds, just like families and businesses do.
O: Colorado’s bond rating stinks.
A: The state of Colorado’s bond rating has been downgraded recently, as has Wisconsin’s. This cannot be blamed on TABOR. Consider: TABOR affects the state and local governments equally, so if TABOR is to blame for Colorado’s poor bond rating, how do opponents explain Denver’s AA+ rating, or Colorado Springs’ AA, or Aurora’s AA? Dozens of local municipal bond issues are listed with mid to high ratings.
O: By requiring a referendum for any bonding, TABOR will strangle economic development and cash flow for locals which depend on irregular payments from the state.
A: Lasee-Wood TABOR will be amended to exempt any bonding for the purposes of economic development. It will also allow bonding without referendum, as long as the debt service can be absorbed into the existing spending limit. Short-term (less than one year) revenue bonds for cash flow will also be exempted.
O: Why do this?
A: There’s a body of evidence that taxes are an important factor in the decision making process for both businesses and people. By ensuring that taxes in Wisconsin will not grow beyond the people’s ability to pay, we will improve our business climate, our economic climate, or job climate. Individuals will have more disposable income, which will help the economy further.
What is the “ratchet effect?”
Because TABOR allows spending growth equal to last year’s spending, plus percentage increases in CPI and population.
During the recession, the state was unable to bring in enough revenues to spend up to the limits: they spent less than TABOR’s limits allowed, because the economy lowered their revenues.
Therefore, the following year, the state’s spending limit equals last year’s spending (which was lower than the limits allowed) plus the growth factors.
For example: in Year 2, TABOR allows spending equal to Year 1 spending ($1,000,000) plus CPI (3%) plus population growth (2%), or $1,050,000.
But, in Year 2, the economy tanks, and government revenues fall. The government only collects (and therefore spends) $950,000.
Therefore, in Year 3, the spending limit will be $950,000 plus 3% plus 2%, or $997,500 – less than they were allowed to spend in Year 1.
Lasee-Wood TABOR will address this in two ways:
First, it will require a budget stabilization fund, which will be funded through excess revenues. The budget stabilization fund will give government another revenue source, to use when revenues fall short.
With a budget stabilization fund equal to 4% of annual spending, our example state would have been able to spend $990,000 in Year 2. The more they’ve saved, the better off they’ll be.
Second, Wisconsin will allow the state and local governments to default to last year’s spending limit, if the current year’s limit is going to be lower.
Going back to our example, revenues fell in Year 2 to $950,000, meaning the state can spend only $997,500 in Year 3, or, if the state used its budget stabilization fund (assuming 4%), Year 2 spending would have been $990,000, allowing spending of $1,039,500 in Year 3.
Alternatively, Wisconsin’s TABOR will allow the government to revert back to the previous year’s spending limit. In Year 2, that was $1,050,000. As long as revenues and/or the budget stabilization fund will provide that amount, that is what the government may spend.
In effect, government is held harmless for falling revenues.
