Subcommittee Hearing on "Proposing an Amendment to the Constitution of the United States
With Respect to Tax Limitation" - March 18, 1997
Testimony of Daniel J. Mitchell
Mr. Chairman, it is an honor to appear before this subcommittee to discuss the proposed amendment to the Constitution that would require a supermajority vote to raise taxes. With the tax burden at an all-time high and April 15 just around the corner, the timing of this discussion could not be any better.
A supermajority amendment is needed to help eliminate the existing bias in favor of bigger government. Economists, political scientists, and other scholars have long noted that it is a natural tendancy for government to expand because of the dichotomy between concentrated benefits and dispersed costs. Simply stated, the narrow portion of the population who take advantage of any given government program have a strong incentive to lobby to create or expand benefits, but the average taxpayer, whose share of the program's costs may amount to only pennies per day, usually does not find it worthwhile to get involved on the other side of the issue.
One way of correcting this bias is to make it harder for government to gain control of resources. A balanced budget amendment, for instance, makes it more difficult to finance additional government spending by borrowing. The tax limitation amendment addresses the other side of the equation, by making it more difficult to finance additional government spending by taxing.
There are three specific reasons why a tax limitation amendment would be a valuable addition to the Constitution:
1) Economic growth -- Congress should make it harder to raise taxes in order to protect citizens from policies that would stunt growth and hinder job creation. Throughout our nation's history, periods of higher tax rates have been associated with subpar economic performance. Herbert Hoover's decision to raise tax rates in 1930, combined with other expansions of government, helped usher in a prolonged period of stagnation throughout the decade of the 1930s. Bracket creep in the 1970s doubled marginal tax rates for average Americans, contributing to a decade of stagnation. Record tax increases in 1990 and 1993 have stunted the economy's growth so far this decade, with 2 percent average annual growth rates that are well below the 3.1 average growth rate the economy enjoyed from the end of World War II to the end of the Reagan era.
2) Balanced budget -- Even though the President's budget falls far short of balance, there is a consensus among policymakers that the budget deficit should be eliminated by 2002. Moreover, this consensus eventually may be fortified by approval and subsequent ratification of a balanced budget amendment. In such an environment, where lawmakers find it difficult to finance spending with debt, there will be a natural inclination to finance spending with taxes. A tax limitation amendment will ensure that future politicians cannot evade the intent of balanced budget requirements by replacing debt-financed spending with tax-financed spending.
3) Tax Reform -- The current tax code is fatally flawed and there is growing bipartisan support for sweeping tax reform. Any move to a simple and fair tax system like the flat tax, however, should be accompanied by binding restrictions on higher tax rates. Failure to approve a supermajority requirement could cause a repeat of what happened after the 1986 Tax Reform Act, when lawmakers reneged on the lower rates/broader base deal by raising rates in 1990 and 1993.
Finally, critics charge that the supermajority requirement would be a risky, untested idea. This accusation is false. Many states require at least a three-fifths vote of lawmakers to raise some or all taxes, and the evidence from the seven states that had such limits between 1980 and 1992 is that supermajorities are associated with superior economic performance and increased fiscal responsibility (several states have added supermajorities since 1992).
In these states -- Arkansas, California, Delaware, Florida, Louisiana, Mississippi, and South Dakota -- the evidence shows that, on average, supermajority states have smaller tax and spending increases, grow faster, create more jobs, and accumulate less debt. Supermajorities, needless to say, are just one of many factors that influence these states' performance, and not every supermajority state beats the average in every category. It stands to reason, however) that making it harder to raise taxes would be at least partially responsible for these good numbers.
Supermajority States Control Tax Burden
On average, states with supermajorities saw their per capita tax collections jump by 102 percent between 1980 and 1992. This is too high, but it is much better than the average 121 percent increase in per capita tax collections that occur-red in states without these supermajority protections. In other words, the tax burden rose nearly 20 percent faster in states that did not limit the ability of politicians to raise taxes.
Lower Spending Increases in Supermajority States
In the supermajority states, per capita state spending on average increased by 132 percent between 1980 and 1992. While this is hardly a record to be proud of, states without supermajority tax requirements experienced average total per capita spending increases of 141 percent. This difference may not be very large, but taxpayers are grateful for even modest improvements in their state's fiscal performance.
Supermajority States Grow Faster
Lower taxes and lower spending are desirable, but the real reason for controlling the size of government is to promote prosperity. Not surprisingly, a supermajority is associated with faster economic growth. States with restrictions on the ability to raise taxes grew by an average of 43 percent in real terms from 1980 until 1992. States that made it easier for politicians to raise taxes, by contrast, only grew on an average of 35 percent during the same period.
Supermajority States Create More Jobs
The combination of smaller government and faster growth in supermajority states means that there is more money available for the productive sector of the economy. This means more jobs. In states with supermajorities, total employment increased by an average of 26 percent between 1980 and 1992. In states that allow taxes to be raised by a simple majority, on the other hand, the number of jobs increased by an average of only 21 percent.
Supermajority States Incur Less Debt
One of the criticisms of supermajority requirements is that politicians would not have the power to raise taxes in times of fiscal crisis, thus subjecting state residents to higher levels of debt. Evidence from the states, however, appears to dispel this fear. In the seven states with supermajorities, state debt increased by an average of 271 percent between 1980 and 1992. This is not a good track record, but states without limits on higher taxes saw average debt increases of 312 percent in the same period.
Conclusion
Empirical data from the states suggests that tax supermajority requirements serve their intended purpose -- helping to limit the growth of government and enabling a more rapid pace of economic growth and job creation. To be sure, a supermajority requirement does not guarantee sound economic policy. The record tax increase approved several years ago in California, for instance, was enacted in spite of a two-thirds majority requirement. And many states without supermajority requirements, such as Tennessee and Nevada, scored well in most categories (not surprisingly, the lack of a state income tax seems to be associated with more growth and less government). Nevertheless, examining the performances of states with and without supermajority seems to confirm the well established relationships between sound fiscal policy and good economic performance. If federal lawmakers approve an amendment imposing a similar requirement on the federal level, there is every reason to expect positive results.
In conclusion, I applaud the Chairman for addressing this critical issue, and will be happy to answer any questions.
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