Tax and Expenditure Limit Reform

Tax and Expenditure Limit Reform is a draft policy introduced by ALEC's Tax and Fiscal Policy Task Force at the States and Nation Policy Summit on December 2, 2016. (Accessed January 5, 2017).

ALEC Bill Text

Summary

Excessive growth in a state’s budget above providing basic goods and services expands the size and scope of government thereby increasing the need for higher taxes and fees, which reduce economic growth, slow job creation, and keep citizens from reaching their full potential. Most states have some form of a rule in place to deal with excessive spending and taxation called a tax and expenditure limit (TEL). A TEL is simply an institutionalized restriction on the growth of tax revenue and/or government spending with a goal of restraining budget growth to a level that can fund essential government services. The reforms include applying the TEL to the total budget and/or to all state funds; basing the limit on the lowest growth rate of population plus inflation, personal income, or gross state product (GSP) for multiple years immediately preceding the regular legislative session when the budget is adopted; and requiring a supermajority vote of each chamber to exceed the limit. This TEL would provide a strict growth limit on spending and taxes by capping most of a state’s budget while understanding that population growth plus inflation may be excessively high, like in the 1970s, and using actual data instead of forecasts.

[TITLE]

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF [State]:

SECTION 1.

[relevant state code sections] are amended to read as follows:

SECTION 1.1. LIMIT

(a) The rate of growth of appropriations in a state fiscal [year or biennium] from:

(1) all state revenues and

(2) all sources of revenue, including the federal government, may not exceed the estimated rate of growth of the state’s economy.

(b) For the purposes of subsection (a), the rate of growth of the state’s economy is the lesser of the following rates, calculated for the two fiscal years immediately preceding the regular legislative session:

(1) a rate equal to the sum of:

(A) the rate of growth of this state’s population; and

(B) the rate of price inflation;

(2) the rate of growth of personal income of this state’s residents; or

(3) the rate of growth of this state’s gross state product.

SECTION 1.2. DUTIES OF STATE BODY GOVERNING BUDGET [BOARD].

(a) Before the [state body governing budgeting], or “Board,” transmits the budget as prescribed by [relevant section of state code or regulation], the board shall determine:

(1) the estimated rate of growth of the state’s economy from the current fiscal [year or biennium] to the next fiscal [year or biennium];

(2) the appropriations for the current fiscal [year or biennium] from:

(A) all state revenues and

(B) all revenues, including federal revenue; and

(3) the amount of:

(A) all state revenues and

(B) all revenues, including federal revenues, that could be appropriated for the next fiscal [year or biennium] within the limit established.

(b) The Board shall use information reported by the United States Department of Commerce or its successor in function, or by other reliable state, federal, or private sources, to determine the estimated rate of growth of the state’s economy.

(c) For purposes of this section, in determining the total appropriations made in a state fiscal [year or biennium], the Board must consider all appropriations made for that [year or biennium], including an appropriation made for that [year or biennium] during a subsequent called or regular session of the legislature.

(d) To ensure compliance with [relevant state code section], the Board may not transmit in any form to the governor or the legislature the budget as prescribed [relevant state code section] or the general appropriations bill as prescribed by [relevant state code section] until the Board adopts the limit on the rate of growth of appropriations of revenues under Section 1.1.

(e) In the absence of an action by the Board to adopt the limitations provided in Subsection (a), the estimated rate of growth in the state’s economy from the current fiscal [year or biennium] to the next fiscal [year or biennium] shall be treated as if it were zero; and the amount of both all state revenues and all revenues, including federal revenue, that could be appropriated within the limit established by the estimated rate of growth in the state’s economy shall be the same as the level of appropriations for the current fiscal [year or biennium].

SECTION 1.3. PUBLICATION.

Before the Board approves the items of information required by Section 1.2, the Board shall publish in the [state rules & regulations publication] the proposed items of information and a description of the methodology and sources used in the determinations.

SECTION 1.4. PUBLIC HEARING.

Not later than [date] of each [even-numbered year or year], the Board shall hold a public hearing to solicit testimony regarding the proposed items of information and the methodology used in making the determinations required by Section 1.2.

SECTION 1.5. LIMIT ON BUDGET RECOMMENDATIONS.

Unless authorized by majority vote of the members of the Board, the Board budget recommendations relating to the proposed appropriations from the state treasury for the next fiscal [year or biennium] may not exceed the limit on appropriations of:

(1) all state revenues, and

(2) all revenues, including federal revenue.

SECTION 2.

[relevant state code section] is amended to read as follows:

(a) The Board shall include in its budget recommendations:

(1) the proposed limit of appropriations from all state revenues; and

(2) the proposed limit of appropriations from all sources of revenue, including the federal government.

SECTION 3.

[relevant state code section] is amended to read as follows:

(a) Unless the legislature adopts a resolution under [relevant section of state constitution], raising the proposed limit on appropriations from all state revenues, the proposed limit is binding on the legislature with respect to all appropriations for the next fiscal [year or biennium] made from those revenues. The limits on appropriations in Section 1.1 (a) are binding on the legislature with respect to all appropriations for the next fiscal [year or biennium] made from those revenues unless the legislature adopts a resolution raising the proposed limit that is approved by a recorded supermajority by each chamber. The resolution must find that an emergency exists, identify the nature of the emergency, and specify the amount authorized. The excess authorized under this subsection may not exceed the amount specified in the resolution.

SECTION 4.

(a) The changes in law made by this Act apply only in relation to an appropriation made for a state fiscal [year or biennium] beginning on or after [date].

(b) Appropriations for the state fiscal [year or biennium] that begins [date], are governed by [relevant code section], as that subchapter existed immediately before the effective date of this Act, and the former law is continued in effect for that purpose.

SECTION 5.

This Act takes effect immediately if it receives a vote of [necessary total votes per house], as provided by [relevant section of state constitution, if applicable]. If this Act does not receive the vote necessary for immediate effect, this Act takes effect [date].