Limits on State Revenue

from the Tax Policy Center Limits on State Revenue Another popular way to limit taxation authority is to require more than a simple majority vote in the legisla- By Alison McCarthy and Elaine Maag ture to increase or pass new taxes. Sixteen states require those supermajorities (see table). Several mechanisms can limit the authority of states to increase taxes. Traditional tax limits either restrict the Eleven states — Arizona, Iowa, Kansas, Nevada, Ohio, amount of revenue state governments can collect or Oklahoma, Oregon, Pennsylvania, Rhode Island, South require that excess revenue be returned to taxpayers. Carolina, and Wisconsin — are considering the adoption Those limits typically restrict the growth of tax increases of new tax limits or the expansion of existing restric- to the growth of population and inflation or personal tions.1 Proponents of traditional tax limits cite the down- income. sizing of state government and the promotion of account- As of February, six states had a tax limit in place. ability and efficiency within state government as primary Florida, Michigan, and Missouri restrict taxation using a benefits; opponents caution that the limits can result in formula based on personal income growth; Massachu- stagnant revenue that can inhibit the government’s ca- setts ties taxation to inflation; Oregon requires any gen- pacity to adequately fund public programs. Proponents eral fund revenue that exceeds 2 percent of the revenue of supermajorities believe that requiring legislators to projection to be refunded to taxpayers. Although sus- reach a broader consensus keeps taxes lower over the pended until 2011, Colorado’s Taxpayer Bill of Rights — long run. Opponents cite the loss of fiscal flexibility and often deemed the strictest tax limitation in the 50 states — the possibility of minority domination of tax legislation. restricts revenue collections, requires that some excess revenue be refunded, and requires voter approval for all tax increases. Missouri and Washington also call for voter approval of tax increases, but only those above a thresh- 1See National Conference of State Legislatures, ‘‘Tax and old. Twenty-six states, including Colorado and Oregon, Expenditure Limits: the Latest,’’ February 2006, available at have expenditure limits. http://www.ncsl.org/programs/fiscal/tels2006.htm.

States With Tax Limits as of February 2006 Traditional Voter Supermajority Supermajority Supermajority Tax Limit Approvala of 3/5 of 2/3 of 3/4 Colorado Colorado Delaware Arizona Arkansas Florida Missouri Florida California Michigan Massachusetts Washington Kentucky Colorado Oklahoma Michigan Mississippi Louisiana Missouri Oregon Missouri Oregon Nevada South Dakota Washington aColorado requires voter approval for all tax increases; Missouri and Washington require voter approval for tax increases over a specified amount. Source: National Conference of State Legislatures, ‘‘State Tax and Expenditure Limits.’’ See National Conference of State Legisla- tures, ‘‘Tax and Expenditure Limits: the Latest,’’ February 2006, available at http://www.ncsl.org/programs/fiscal/tels2006.htm.

TAX NOTES, July 31, 2006 443