(Editor's note: This article is a reprint from the March 1979 issue of ILLINOIS ISSUES)

While California's Proposition 13 has received the most conspicuous coverage in the nation's media, it was not the first nor even the most comprehensive measure undertaken by a state to control its spending and the spending of its local governments. Three states — Colorado, New Jersey, and Tennessee — instituted spending limits of various kinds before the California measure was enacted; and voters in 11 other states, including Illinois, have since expressed their opinions on proposals on spending and other taxes.

Property tax rollbacks of the Proposition 13 variety were passed last November in Idaho and Nevada, while voters rejected similar measures in Michigan and Oregon. In Arizona, Hawaii, Michigan and Texas, voters approved measures to impose limits on taxes and spending by keeping them in line with general economic growth in those states. Similar measures were rejected in Colorado, Nebraska and Oregon, but voters in Missouri gave their legislators the authority to reduce property taxes, and those in South Dakota voted to require a two-thirds majority in their legislature to enact any increase in taxes.

State and local taxes have been taking a larger percentage of people's income during the last 15 years. The increase 1960 through 1975 for state and local taxes is 303 percent. During the same period, U.S. personal income has brown 213 percent, the federal budget by 204 percent and the Gross National Product by 197 percent.

While the results of the voting on the Thompson Proposition strongly indicate that the people of Illinois want a limitation on the growth of state and local government, it is not clear what form those limitations should take. The measures developed by other states provide a context in which to examine the alternatives, however, and four basic types of spending limitation plans emerge: the Tennessee plan, the Arizona plan, the Colorado constitutional plan and the Colorado statutory plan. These represent four basic methods that other states have employed to limit state and local spending.

Since the limitation of state spending from state sources is the most common method of restraining government growth in other states, this analysis will focus on the implications of such measures for Illinois. It is not crucial to the analysis whether spending or taxes are limited, since the two are so closely related. From 1970 to 1977, Illinois tax revenue increased an average of 9 percent per year, while spending from state sources increased an average of 10 percent per year.

All states that have adopted or considered limitations on the growth of government have exempted federal aid from the limitation. This raises a potential problem because federal aid for specific programs may be withdrawn in the future. If and when this occurs, the state must either appropriate money for the program — subject to the spending limit — or the program must be dropped. Since it is difficult to completely abolish a program after it is begun, this provision may result in the state funding programs that would not have been started in the absence of federal aid.

The Basis of the Limit

The Tennessee plan allows state spending to increase at the same rate as the growth of the state's economy. In Tennessee and other states with this type of limit, personal income has been established as the measure of growth of the state's economy. Analysis of the average annual increase in Illinois personal income, tax revenue and spending from tax sources during the period 1970-1976 shows that revenue and spending in Illinois are closely tied to the growth of personal income. Personal income of a state grows because of inflation and real economic growth (expansion in the level of goods and services). Illinois revenue is closely tied to personal income because the sales tax and the income tax, which combine to produce nearly two-thirds of the state's tax revenue, are both dependent on inflation and real growth in the economy. Revenue from the sales tax increases as more goods are purchased (real economic growth) and as the price of goods rises (inflation). Income tax revenue goes up as more people are employed (real economic growth) and as individual wages rise (inflation or productivity increases).

The figures in Table 1 show that the adoption of a Tennessee-type spending limitation in Illinois would not have greatly affected the state's spending since 1970, primarily because Illinois adopted no new taxes during this period. After Illinois adopted the income tax, revenue and spending increased 48 percent in one year, 1969 to 1970, while personal income increased 6

Illinois Parks and Recreation 14 May/June, 1979

percent. The adoption of the Tennessee-type limitation would prevent Illinois from levying any new taxes, or increasing the rates of existing taxes. But as long as the tax system is not altered in Illinois, state spending is already closely tied to personal income in the state.

Table 1 Illinois spending as a percentage of personal income (millions)
Personal income (calendar year)	State spending (fiscal year)	Spending as % of personal income
1976 $82,502	1977 $5.611	6.80%
1975 75,666	1976 5.143	6.79
1974 69,396	1975 4.761	6.86
1973 64,833	1974 4.262	6.57
1972 57,829	1973 3,876	6.70
1971 53.400	1972 3,547	6.64
1970 50,131	1971 3,272	6.52
1969 47,340	1970 2,999	6.33

This type of limitation plan causes some problems because personal income must be estimated. In Tennessee the state legislature voted to use the estimates of state personal income determined by the Tennessee Econometric Model developed at the University of Tennessee. In Arizona, the legislature established an Economic Estimates Commission which is required to publish final estimates of personal income in the state. The accuracy of these estimates is important since the level of state services is dependent on them.

The Arizona-type spending limitation plan requires that state spending may not exceed a fixed percentage of state personal income. Table 2 shows the relationship between Illinois personal income compared to spending from tax revenue. State appropriations from tax sources have been between 6 and 7 percent of state personal income from 1970 to 1977, which emphasizes the stable relationship between Illinois personal income and spending.

A Colorado constitutional amendment to limit spending was rejected by voters in November. It would have allowed spending to increase at the same rate as the rate of increase in the consumer price index. Table 2 shows the percentage increase in the consumer price index, compared to the percentage increase in state spending from 1970 to 1977 in Illinois. Table 2 shows that state spending from tax revenue in Illinois increased more than the increase in the consumer price index for every year since 1970. If implemented in Illinois, this Colorado constitutional proposal (as opposed to Colorado statutory limit) would allow state spending to keep pace with inflation, but no new programs could be added without cutting some existing program.

The Colorado statutory plan limits appropriation increases to 7 percent over the previous year. Since this Colorado statutory limit does not take into account economic conditions in the state, the choice of the constant percentage limitation becomes very important. If the increase is less than the average annual rate of inflation, about 7 percent in recent years, state spending will not keep up with increasing costs.

Table 2 Change in consumer price index (CPI) compared to change in spending*
Period	% change in CPI (calendar year)	% change in spending (fiscal year)
1970-71	4.30%	10.32%
1971-72	3.30	9.57
1972-73	6.22	8.79
1973-74	10.97	13.13
974-75	9.14	12.26
1975-76	5.77	7.48
1976-77	6.45	8.86

* The consumer price index for a calendar year is compared to spending in ihe fiscal year beginning July 1 of the calendar year.

This type of plan has characteristics which make it particularly attractive as a method of limiting the growth of local government spending. Since spending is limited to a fixed percentage increase per year, there are no complications in estimating personal income or price changes in the area of local governments. Although this plan is less flexible than the other three plans, local units of government would know their future maximum levels of spending with complete certainty. By allowing small increases in local government spending (3 to 5 percent), large increases in the property tax may be avoided.

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Illinois Parks and Recreation 15 May/June, 1979

TAX & SPENDING

Continued from Page 15

Excess Revenue

Limitations on the growth of government activities are generally directed at restrictions on spending. Since the tax system is not changed, a growing economy may produce tax revenue in excess of the spending limit.

Since Illinois' flat rate income tax would not cause tax revenue to increase as fast as Colorado's graduated income tax, Illinois taxpayers should not expect similar tax relief from surplus revenues.

Intergovernmental Relations

Although all spending limitation plans exclude federal funds from the limitation, federally mandated programs could cause problems. If a federal mandate requires state or local governments to undertake a specific program and provides the financing of the program, this spending would not be charged against the limitation. But if the federal government does not fully fund the mandated program, the state or local funds used would be subject to the spending limitation.

Debt Limits

It is difficult to predict the long-run consequences of taxing and spending limitations because the oldest state limitations have been in effect for less than two years. However, an examination of the history of Illinois' experience with debt limitations may point out some unexpected results of constitutional restrictions. Under the 1870 Illinois Constitution, state debt could not exceed $250,000 (except to defend the state from invasion or war). This limitation was not effective; by 1970 Illinois had incurred $1.3 billion in debt, of which more than $1 billion was in revenue bonds used to evade the constitutional restriction. These revenue bonds were not backed by the full borrowing power of the state, and their interest rate was 1/4 to 1/2 percent higher than on general obligation bonds. The final result of the constitutional restriction on state debt was an increase in the cost of debt service for the State of Illinois.

Effective spending limitations on state and local governments may cause new programs to be undertaken at the federal level, speeding up the centralization of government, and causing federal spending and taxes to increase. An effective limit on federal, state and local spending could mean that in the long run services such as education and transportation may no longer be affordable to government and may instead be provided by private companies operating for profit. Spending limitations will not cause the demand for new services to disappear, but may result in these services being provided by different organizations in the future.

One's view of tax and spending limitations depends on his view of the proper role of scope of government. Economist Milton Friedman believes government is the cause of most of the problems in society, and he "is in favor of tax cuts under any circumstances." On the other hand, economist Walter Heller believes that tax limits cannot deal with issues of fairness and equity in taxation and effeciency of government.

Gary E. Schmitz, Research Associate for the Illinois Legislative Council, "Tax and Spending Limits: What Other States Are Trying", Illinois Issues, March, 1979, pgs. 4-7.

Illinois Parks and Recreation 24 May/June, 1979