Frequently Asked Questions - Q4


How effective are tax and expenditure limitations (TELs)? Has this proposed charter amendment been compared to TELs actually enacted?


Tax and expenditure limitations (TELs) at the state level have been enacted into law in 26 states and some have been around for years. Undoubtedly, there would be more, but in 24 states citizens have no means by which to put initiatives on the ballot. Some state TELs (such as in California and Colorado) also apply to local governments. The effectiveness of TELs has been evaluated by several research groups, perhaps most notably by: (a) Cato Institute, July 25, 1994, Policy Analysis No. 213; (b) National Taxpayers Union (NTU), May 21, 1999, Policy Paper 114; and (c) Cato Institute, December 13, 2001, Policy Analysis No. 420. Those research papers show that TELs definitely are effective, when properly designed, resulting in slowing the growth rate in per capita spending and increasing the growth rate in personal income. Cato’s 1994 document states that the ideal TEL should have the first nine desirable characteristics listed below. Cato’s 2001 document adds the tenth ideal characteristic. This proposed TEL city charter amendment corresponds almost perfectly to the Cato list of ideal TEL characteristics. Both Cato studies and the NTU study show that the key factor is that TELs are successful where the TEL is voter-initiated and voter-approved (as is the case with this proposed charter amendment). The three studies show, however, that TELs are not successful (in fact, actually result in undesirable increases in per capita spending) when they are both initiated and approved by the legislature. See characteristic 1 below as to why.

Cato’s ideal TEL characteristics:

  1. It should originate with and be approved by the voters (as in this proposed amendment), where possible, rather than by the legislature (example here is our city council). Cato’s research states that TELs that originate in the legislature are written by politicians—the very people whose behavior they are intended to restrain-- thus those TELs tend to be more vague, less restrictive, and more easily circumvented.
  2. It should be constitutional (part of the city charter) rather than statutory (as in city ordinance).
  3. It should apply a cap to 100 percent of the budget (thus include Enterprise Funds) rather than to only certain categories (as in just property taxes or just the General Fund).
  4. It should cap spending rather than revenue or taxes. (Regarding the few existing TELs that cap revenues, rather than expenditures, Cato’s study says that “---Each fiscal year, states must estimate their revenues for the forthcoming year, in part on the basis of how the state’s economy will perform. Those economic forecasts, and hence the revenue estimates, are often quite inaccurate. Further, politicians can manipulate the economic forecasts in an effort to get around their TEL’s restrictions. Therefore, the use of revenue estimates as the base for a TEL is not ideal---“. This ideal TEL characteristic does not apply in the case of the proposed charter TEL amendment for Houston. That is because this proposed TEL caps revenue based upon actual growth in population and inflation, in the preceding year, with both growth indicators being derived from very specific data from very specific governmental agencies. (Also see Q&A 12.)
  5. It should limit the growth of spending to the growth rate of population plus inflation (as in this proposed amendment) rather than to the growth of personal income.
  6. It should require voter approval (as in this proposed amendment) for its provisions to be circumvented.
  7. It should apply to both state and local governments. And it should allow for transfer of responsibility to local governments and provide for the appropriate adjustments in each jurisdiction’s limit. (This characteristic applies only in the case of a state TEL, and thus has no applicability to this proposed city charter amendment.)
  8. It should not require additional action by the legislature (example here is city council) for implementation. (It does not.)
  9. It should give taxpayers standing to sue to enforce its provisions and require injunctive relief to prohibit any illegal taxes or spending while suit is pending. (See Q&A 35 for elaboration as to how this proposed amendment deals with this subject.)
  10. It should require immediate taxpayer refunds of surpluses, thus affording better assurance that taxpayers will sue upon noncompliance by the governmental entity. (This proposed amendment requires immediate refunds upon the refundable surplus reaching $10 million.)

    The three mentioned research documents can be read for further explanations on each of the ten characteristics. Based upon a comparison of this proposed amendment to the Houston city charter to these ten ideal TEL characteristics, the proposed amendment truly is an ideal TEL. The proposed amendment should result in slowing the growth rate in the cost of Houston city government and should increase the growth rate in the personal income of Houstonians.

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