The Case for a Pennsylvania Tax and Expenditure Limitation

Executive Summary

In recent years, states across the United States with both limits on how much their governments can tax and/or spend and “super-majority” provisions that make it more difficult for elected officials to raise taxes (or such provisions alone) have economically outperformed states that have weaker or no such fiscal restraints. Tax and expenditure limitations (TELs) are constitutional or statutory provisions designed to ensure that tax and spending growth does not exceed the rates of inflation and population growth or a given measure of statewide economic growth, and “super-majority” provisions require legislative votes above a simple majority to enact tax increases.

The available evidence suggests that while TEL and tax “super-majority” provisions do not automatically produce sound economic and fiscal policies, states using them have generally limited the growth of government, and states using both (or just a “super-majority” rule) have experienced more robust economic expansion than states without them. For example:

• Between 1995 and April 2003, the 14 states with either some type of TEL (revenues, expenditures/appropriations, or both) and a “super-majority” provision or a “super-majority” provision alone had an overall employment growth rate of 14.1 percent, compared to 8.1 percent in the 36 other states (including Pennsylvania) and the District of Columbia (some of which had appropriations/ expenditure or revenue limitations, but none had “super-majority” requirements). During that time period, Pennsylvania alone had an employment growth rate of 6.8 percent. The 14 states’ cumulative employment growth rate was 107.4 percent higher than that of Pennsylvania.
• Between 1995 and 2001, the 14 states with either some type of TEL (revenues, expenditures/appropriations, or both) and a “super-majority” provision or a “super-majority” provision alone had a gross state product (GSP) growth rate of 44.1 percent, compared to 36.3 percent in the 36 other states (including Pennsylvania) and the District of Columbia (some of which had appropriations/expenditure or revenue limitations, but none had “super-majority” requirements). During that time period, Pennsylvania alone had a GSP growth rate of 28.1 percent. The 14 states’ cumulative GSP growth rate was 56.9 percent higher than that of Pennsylvania.

Pennsylvania’s ongoing fiscal problems are the result of a series of executive and legislative failures to limit increases of state taxes and spending to at least the combined rates of inflation and population growth. At the state level alone, overall total state operating expenditures rose at a rate 182 percent faster than the concurrent rates of inflation and population growth between 1971 and 2003. This state spending growth was accompanied by the corresponding rapid growth of local government spending, which (excluding intergovernmental expenditures) rose 91.5 percent faster than the concurrent rates of inflation and population growth between 1992 and 2000. Meanwhile, Pennsylvania lagged far behind most of its competitor states in terms of population, employment and income growth.

Enacting a tax and expenditure limitation with a “super-majority” requirement to increase taxes would leave more money in Pennsylvania’s private sector economy for investment and job creation. In fact, given the magnitude of past Pennsylvania spending increases, it might be advisable to enact even stricter limits than those present in other states. Keeping more money in the hands of families and businesses also forces government officials to set spending priorities, eliminate non-core government functions, and improve the efficiency and effectiveness of the programs that must remain. The overall effect would be to significantly improve Pennsylvania’s fiscal and economic performance.