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Show-Me Institute Podcast

How Fast Should Government Grow with Elias Tsapelas

Susan Pendergrass speaks with Elias Tsapelas, Director of State Budget and Fiscal Policy at the Show-Me Institute, about his recent report, "Missouri's Hancock Amendment: A Primer." They discuss the historical context and significance of the Hancock Amendment, its impact on Missouri’s fiscal policy, what can be done to improve protections for Missouri taxpayers, and more.

Read the full report here: https://bit.ly/3Uzznoh

Produced by Show-Me Opportunity

Duration:
29m
Broadcast on:
02 Jul 2024
Audio Format:
mp3
(upbeat music) - It's the Show Me Is To podcast welcoming back to Laius Chappellis, the works at the Show Me Is To. You are our director of state fiscal policy? Is that right? - State budget and fiscal policy. - State budget and fiscal policy, very important things. And you know, tell me, you tell me the number, but didn't Missouri have a record budget this year? - Yeah, it's, you know, we've been on a run of record budgets, but this year we're about 53 billion. It was actually, there's a chance that it's technically smaller than last year's, but so the first time in a decade that we might have a budget that's smaller than the year before. But I'm not convinced we'll make it all the way through the year with that record. So I'm still saying record breaking budgets. - And our population is level, roughly? - Yes, roughly level, you know, inflation's high, but people aren't really coming to the state where we're just spending more on the same things and even, you know, expanding into new areas, which is definitely concerning. - Yeah, so basically, you know, there is some, you have a paper out, by the way. And the topic of this paper is a little understood constitutional provision in Missouri called the Hancock Amendment. And that's what we're gonna talk about. However, prior to that, I wanna say in your paper, you go back to one of the, at least Austrian economists who has this idea that, you know, government should grow maybe, as you just said, along with population and inflation. But the idea that government would always, always grow regardless of where population or inflation are going, just always get bigger, bigger, bigger, that's something that we as citizens and taxpayers should be concerned about, is that right? - Yeah, and I think what you've seen across the country is that taxpayers really are concerned about it. Voters are concerned about it. Roughly 30 states have what are called tax and expenditure limits, which is essentially, they've been asked, you know, hey, do you want some say in whether, you know, the government's going to increase your taxes or, you know, grow relatively quickly because as we have, you know, all these states have income taxes, property taxes, sales taxes, you know, when inflation goes up or wage growth, you know, those are things that when you're being taxed at a percent of, you know, your earnings or what you're paying, that really can just go to fund more government and a lot of people have, you know, problems with that, you know, if it's more difficult to go to the grocery store, you know, buy which you normally buy, you know, that money shouldn't be fueling necessarily, you know, additional government services, but at the same time, there's the recognition that, you know, what level of services the government is providing, you know, those things can get more expensive. So trying to kind of draw that line between, you know, giving the government, you know, private sector growth, giving the government permission to grow, but also, you know, just our elected officials being sort of accountable and understanding the level of services that their constituents want. - Yeah, I mean, one example that comes to mind for me is early childhood care or early childhood learning programs and that those have largely been in the private sector in recent years and last decade, and especially during the pandemic, states started to take that over and states started to provide that. That is an example of just literally adding government services that didn't exist before that the states said, okay, we're gonna provide this now. And most were like, great, we think everyone should have it, but at some point you, as the taxpayer, you also have to pay for it. - Yeah, and what you see with, I mean, specifically in childcare is, you know, as the government becomes a bigger player in there, then you have to, you know, it expands from being something for low-income people to, you know, you're expanding it to more people, well then as more of the sector is supported by government rates, you know, then there's more of a push to, you know, let's raise the rates. Well, you know, more people are involved, more businesses are involved, raising the rates becomes much more expensive. And then, you know, the question is, do you raise taxes to pay for that? Or, you know, where does that come from? And a lot of times, you know, people are ready to say, hey, you know, it'd be nice if everyone had access to that. But then as soon as it comes to, you know, well, you know, do you cut something from, you know, K through 12 education to pay for that? And, you know, the question is about, maybe not. - So 45 or so years ago in Missouri, you just mentioned these tax and expenditure limits that essentially taxpayers are citizens. Generally want to place on state government spending and state government size. So in Missouri, 45 years ago, a constitutional amendment was passed called the Hancock Amendment. Who's Hancock? - So Mel Hancock was a congressman from Missouri. He was from around Springfield. Basically, in the '70s, there was the crazy inflation and you started seeing essentially growth in government all across the country. And so that led to what people have now sort of referred to as the tax revolt. But it started kind of in California. They basically put a limit on, you know, just how much government could grow. And that sort of idea, even though it didn't really last in California, started expanding to other states and states like Missouri and eventually, basically 29 others, adopted something where you're trying to kind of tie tie government to something. And so Mel Hancock's idea was to tie state revenues basically to a measure of personal income. So it wouldn't grow faster than Missourian's pocketbooks or at least that was sort of the idea. And it was very popular, popular with voters. But ultimately, it was supposed to be very strong. Ultimately, you know, as well, I'm sure we'll get into, it hasn't really worked out that way. - What happened? - Well, constitutional amendments are pretty difficult. What people don't necessarily realize is, you know, this goes into the constitution, the legislature can't really change anything about it. And so if you put something in there that could grow out of date, you know, that's just going to lead to problems. But also some of the theories behind what they were doing there have kind of, we found better ways to do things. But ultimately, you know, this was something that passed in 1980. And the metric that they decided to tie state revenues to was essentially a fraction of what state revenues were in 1981, fiscal year 1981. So technically that was a little bit of the year 1980. But also the personal income of Missourians from 1979. So we essentially decided to tie the size of state government to this fraction of static years from, you know, now four years ago, so 40 years ago. - So what was the number? What was the number? - What was the number? I don't have it in front of me. - I have it, it was 5.6. So basically in 1980, they're like, okay, total personal income in the state equals 5.6% of total state revenues. So going forward every year, let's lock in the limit to the state budget at 5.6% of personal income. Is that basically what they did? - That was basically what they did. And they also said, you know, essentially the only revenues that this applies to are the ones that we have right now. And that also has kind of become problematic because, well, first thing, 5.6, you know, who's to say if that was a good, you know, number forever, right, things have changed a lot, at least in terms of government in the last 40 years. But it's also become kind of problematic with basically saying, okay, well, this list of revenues is what everything should have, this should apply to because as time has passed and government has grown, there's also just been tons of efforts to essentially carve different revenues out of what is being included there. So government has grown, but it's essentially grown in ways that are outside of what this, what this Hancock Amendment was trying to limit. - So two things have happened. It looks like that limit of 5.6 times personal income is actually far outside. It's much higher than the number of total state revenue as it was defined 45 years ago. So it's like not even a limit, right? - Right, yeah, it's not really a limit. And I looked whenever I was putting this paper together, essentially across the country, you know, if you just tried to scale, you tried to do the same thing that Missouri did, you know, tie a fraction of revenues to personal income and then just sort of look at personal income growth over the last 40 years. And essentially, personal income has just grown faster, basically everywhere. And so even if you wouldn't have seen, even if you wouldn't have had a limit, it wouldn't really be doing, it wasn't really doing something and it couldn't have done something in states that didn't have a limit just because personal income has grown that much. And really that is the success of, you know, the economy, the private sector where you're seeing this wage growth, that's where, you know, this has really worked. And so there's definitely better measures to tie government if you were wanting to really limit it. - Like what? - Well, so what we, what the show me to basically, we have been rolling out this taxpayer bill of rights and what I talked about in this paper a little bit, is tying it to population, the sum of population and inflation growth. And so the idea with that is basically looking at government and trying to basically lock in a set of services. So what they did in 1980 was they basically locked in that, you know, 5.6% or whatever, you know, basically saying this number of revenue in our personal income, that's a good metric for all years to come. Well, instead what you really should look at is, okay, let's say we have this set of services today. What should, you know, what would really increase the cost of these things? What would that be? And, you know, that's basically the allowable growth. In anything more than that, you essentially would have voters weigh in or, you know, that's a, that's sort of showing that government is growing. So you basically would have revenues would grow if more people move to the state. More people are paying taxes. You know, that would make sense that it would go up. And also inflation, just because things get more expensive. Okay, well, those are the reasons. So you have that and that actually has turned out to be a much better metric than income. All basically, if you look all across the country and Missouri's government would look much different today if we would have used population and inflation. But, you know, personal income is something that a lot of states have tried. It just hasn't turned out to work. Yeah, I mean, I'm thinking about the services needed by somebody with a really high income, somebody with the average income, you know, roads, police, school, those numbers don't really change with income, but they do change what you're suggesting as they change with the number of people. Yeah, and, you know, some people bring up, you know, okay, so Missouri's government provides a lot of healthcare. So, you know, some different parts of the economy, you know, scale with different, you know, there's different measures of inflation. And, you know, there are ways you could sort of bring that together. You know, healthcare costs are growing faster than grocery costs, you know, something like that. But ultimately, most of your services, I mean, even just Medicaid generally, it's mostly gonna grow by enrollment increasing. Most of your services, school funding, you know, more kids, there's gonna be more. So really, that's gonna be your best metric. And if you have some sort of limit like this, it's also kind of subtly an incentive, you know, for states to, you know, focus on, you know, getting more people into your state, because if you wanna grow the government, more people there, you're gonna get more revenue. So, technically, with this Hancock Amendment, but if state revenues had grown faster than 5.6% of personal income, the state was supposed to refund the money back to people. Is that right? - They were supposed to, yeah. Back in the 90s, there were a few years where some refunds actually went out, but it wasn't long after the amendment passed that the legislature basically figured out ways around giving the money back. And so at first, it was something where they figured out, well, so this is based off of revenues. So one way we can keep it so that our revenues don't exceed this limit is if we just never receive those revenues. So they started giving out tax credits, which essentially allowed people to, I mean, it essentially functions as the government paying the recipients of these tax credits, but the way it is accounted for is that those recipients just don't pay those taxes. And so if Missouri thought that they were going to exceed the limit by the revenue limit by 100, 200 million dollars, they would just issue 100 to 200 million dollars of tax credits, give those tax benefits to the chosen people or businesses that they want chosen industries. And that way it was more focused on where they wanted as opposed to being spread out amongst Missourians. And then essentially after the explosion of tax credits in the 90s and the explosive essentially economic growth of the 90s, Missouri basically started seeing a wedge between the limit and the total revenues of the state and that gap has only widened. And so now there's essentially no real chance that we're ever going to see refunds again unless the amendment is changed. So is there a state out there that's done this well put limits on their state growth? - Yeah, Colorado is what is considered the gold standard of something like this. They call it their taxpayer bill of rights. And so that's something that I've been working on, at least a lot, lately trying to kind of see what that would look like for Missouri. But what Colorado did was they went the route of the population tying their revenues to population and inflation growth. And they were just much more strict about how you could really grow government. Missouri's Hancock Amendment was amended in 1996 because people basically figured out that the legislature could raise taxes without voters weighing in. And the Colorado amendment never really had that problem. There's frequent votes in Colorado for basically their table or what they call it, their table votes for different extensions of taxes, raising taxes at all levels of government. And because their population and inflation growth has really limited things, on top of the fact that their state really is growing a ton. They're one of the fastest growing states. The Colorado taxpayers have received over $8 billion in the last few years just in refunds. And I think there's more on the way in Missouri, even though we have had pretty significant growth in recent years, Missouri taxpayers aren't receiving any of that. - Yeah, I remember hearing that when they were one of the first states to legalize marijuana, they took in so much in state income tax that they ended up having to refund it back because of their Tabor or taxpayer bill of rights amendment. What would we have to do though if we wanted to make this, we wanted to take Missouri from the Hancock Amendment to something like a Tabor or taxpayer bill of rights, we have to take an amendment out of the Constitution or how would it work? - Well, there's a few different routes you could go. And in my paper, I sort of outlined how you could change the Hancock Amendment. So I mean, it would require, since the Hancock Amendment is in the Missouri's Constitution, you would have to amend the Constitution and try to kind of go after these different problems. You know, catching up the revenue limit, making it so it's not out of date, updating the revenues that are included. And when it comes to the 1996 piece, there was just some issues with how they essentially would force tax votes essentially. The legislature sort of figured out ways to raise taxes without it going to voters because of some limits in the amendment. So you technically could go in there and change some of that. But the Hancock Amendment actually applies to local governments as well and does a few other things that I think a lot of, I think a lot of Missourians really, you know, rely on. It actually works pretty well. It's not all-- - You mean you have to vote on tax increases or vote on sales tax? - Yeah, so local governments, you'll see all the time with, you know, issues for schools, you know, you're voting on different things. I mean, almost all of those votes are basically forced by the Hancock Amendment. It also, the Hancock Amendment also has something called, it basically bans unfunded, what they call unfunded mandates. So whenever you start talking about limiting what the state government can do, one of the first things people start worrying about is, well, you know, if you're gonna make it harder for the state government to spend money, what they're going to do is just make local governments pick up the slack. And so putting something in there to say that they can't really cause shift is really important and, you know, states like Colorado also have that. But one issue with trying to go back and amending Missouri's constitution is that what we saw in 1996, which was this addition to the Hancock Amendment, is that when you go try to fix, when you go try to fix these pretty complex language, you can really just introduce new problems because this is ultimately still in the constitution. The legislature can't really do anything about it. And a lot of it gets kind of kicked to the courts and, you know, you end up, you know, they thought they were fixing things in 1996 and it sort of seemed like they had. Ultimately, it turns out what they had done didn't really work at all. We just didn't realize it for a while. And so that's why I would say, you know, it's probably better to try and come with a new tax and expenditure limit that would go over this revenue limit, but you would still sort of keep some of the, you know, good and functioning parts of the Hancock Amendment. You wouldn't have to scrap the whole thing. You would just, you would just kind of go and replace the sections that we know have problems as opposed to trying to go in there and tweak the language and such. - I'm thinking though, like if you're a lawmaker and you have this imaginary limit that doesn't affect you because it's, you know, so far above what the budget and our revenue ends up being in those categories, it's not really bothering you. It's not really limiting what you can do. Why would you want to change it? - Yeah, the, I will say I've, you know, went to Jefferson City and there's not necessarily a ton of appetite for some of these things, but part of it is that they don't necessarily understand it. And I don't think, I don't really think that, I don't really think that everyone completely understands that the part that bans or essentially forces public votes on tax increases. I don't think everyone really understands that that section is not really working. I mean, where we saw that that section has problems was when Missouri raised the gas tax a few years ago, what essentially they found out was that if you raise a tax over multiple years, the way the Hancock Amendment works is essentially says the legislature can't raise essentially increased revenues by a certain amount in a given legislative session. Okay, well, basically the way that this was formulated in 1996 when voters approved it, they didn't really take into account, well, what if the legislature passes something that, you know, implements over five years, but each year it raises the, raises taxes just below what the limit is. The, the, it just doesn't really have a good way to deal with that. And ultimately, I don't think a lot of legislators are, you know, going to Jeff City every year, looking to raise taxes. So that's part of why we haven't necessarily seen it. There are plenty of people that work on the budget that are happy that we're not up against the, the revenue limit every year. You know, that isn't doing anything to them. And, you know, a lot of lawmakers would, you know, prefer to just keep the money that comes in as opposed to giving it back out. I mean, you kind of have to exceed the limit by a lot for the refunds to really amount to a ton to, to Missourians, I mean, ultimately, how the Hancock amendment works right now, the refunds go to income taxpayers, basically as a share of essentially what they paid. But if, you know, I mean, just for example, if you say there's 6 million Missourians and the revenue limit is exceeded by $100 million, you know, that that's not really amounting to a lot of money going to everyone. - $15 or, yeah. - You know, you're looking at something very, very small and there's a ton of effort that goes into getting those, you know, getting the checks out, you know, the postage. I mean, there's tons of stuff that go into that. And you're not gonna see a ton of times where, you know, revenues went up by a billion dollars, you know, something that was going to, you know, really increase things. So that's sort of how legislators justify it. But I think, I think there are plenty of people in Jeff City that are just happy to, I don't know, the Hancock amendment hasn't been as big of a deal lately. I think, well, over the last 10 plus years, it has become a bigger deal the last few years just because of the incredible growth in government and inflation, it's kind of come back into light. But I think plenty of people are, you know, happy to leave it back in the shadows. - Well, it seems like if there's a way to do it, and I know that I think what you're describing is every time the legislature bumps up against a restriction from the Hancock amendment, they just find a workaround, right? They just, okay, we'll give our tax credit. It's said, okay, we'll call this prop C. We won't call it general revenue. We'll call it this revenue thing. We won't call it general revenue. Won't even be subject to the Hancock amendment. We'll spread these tax increases over five years. It's like they keep looking for the workaround. So can you make an airtight amendment, probably not? But we do what I hear you saying is you're working on a similar idea from Missouri to Colorado's where we would actually have a taxpayer bill of rights that would protect taxpayers from, like, excessive government growth. - Yeah, well, one of the ways you can do this, and a lot of people have studied these in the last few, over the last few decades, because when Missouri adopted the Hancock amendment, you know, these things are relatively new. I mean, I certainly don't think when people put this thing together, you know, Mel Hancock put this together, that he thought that the legislature was gonna find, you know, ways around it. I mean, ultimately it took a long time, but everyone's going to try to find a way around it. I mean, just in Colorado, there was a vote this past year trying to sort of go around their taxpayer bill of rights. I mean, that's a constant thing for groups that want money, but, you know, what you can do besides limiting revenues is you can go in, you can limit expenditures. And so if you say, okay, instead of setting a, you know, a fraction, like Missouri did, you can say, okay, well, you know, you can't spend more than, you know, let's just look at last year spending. You can increase spending by more than the rate of population and inflation growth. And so, you know, if you just start there, that's something that's a little bit harder to go around, because you're, you're not tied to some, you know, 40 year old metric, you're just looking at last year and say, okay, well, here's inflation and population growth, pretty easy numbers to find. You can see sort of where, you know, that number, the legislature could go into the budget, go into their budget negotiations, knowing, you know, how much money there is. And then what we've been talking about with our taxpayer bill of rights here is essentially something where we would also put something on the revenue side where you would essentially do both, which no state is done. But you would essentially want something on the revenue side when, so like over the last few years where there was all the federal influx money. So all the time, you wouldn't have major impact from a revenue and expenditure limit at the same time. But there are times where you could have an influx of revenues that would be far and above what you could spend according to your spending limit. And the question would be then, well, what do you do with that extra money where in recent years, you know, or ideally that would go back to, you know, taxpayers, that's what Colorado does. That's what Missouri in theory was supposed to do. But, you know, you could also say, you know, you could also say lower taxes. I mean, you could build a rainy day fund. That's one of the things that we're looking at here just because Missouri keeps getting ranked as one of the worst prepared states in the country for a recession. And our rainy day fund is also a constitutional amendment hasn't actually been able to be used in a recession. So, you know, putting some money aside, because what has happened now, I don't know if you've seen all the articles about it, but essentially what the legislature and the governor has done in recent years is there's been a revenue surplus and they just kind of leave it. They just kind of leave it in the bank. You know, it's just a little money on the bottom line. It's not in a specific fund. And so then whenever they decide, you know, going into the budget, like, well, you know, let's just spend a little more. And, you know, they just can because it's there. Well, you know, it's probably-- - Balance budget light, right? - Right, you know, it's not balanced for this year. You know, we're gonna spend more than we're expected to bring in, but, you know, we saved a little bit last year. It didn't go into a fund where, you know, it had some rules on it to use. We do have a fund for that. We just don't put it there because, you know, it's a little bit harder to take it out. So the idea would be, you know, we could get something that actually would protect us against, you know, an economic downturn. And then hopefully we wouldn't have to be so reliant on the federal government and kind of fuel the, you know, last few years we had here. And it would kind of help against some of the, you know, funding, funding drop-offs or, you know, funding all the changes in funding are pretty difficult for states to deal with. And that is one of the big pushbacks on tax and expenditure limits. You know, it's essentially what are states going to do when times are bad. And, you know, if Missouri doesn't have a, if Missouri doesn't have a functional rainy day fund, you know, that is a pretty big concern. And so that is something that, with our taxpayer bill of rights here, where we are trying to address, and, you know, states, a lot of states have better rainy day funds in Missouri. This is not where we're definitely in the minority in terms of, you know, not wanting to set money aside. - So it seems to me like this change would have to come from sort of a grassroots, from taxpayers, and not all taxpayers, very informed taxpayers. If folks want to find out more about this, you have a primer out, a primer, the Hancock Amendment primer is available now. And you will be releasing soon a paper on the taxpayer bill of rights idea. - Yeah, and I think it'll be a little bit more like a brief. It's not going to be super in depth, but it will definitely go into the, you know, the principles of, you know, what something like this would involve. And there's still a chance that the legislature could get behind this idea, but, you know, I'm not necessarily holding my breath, but there will be plenty, you know, plenty more info coming out on this, because ultimately, we don't really think that this government growth is going to be sustainable, and, you know, Missourians really are going to need to push back on some of these things, because if you don't find any places to cut funding, the only answer is to raise taxes. And now that we know that the legislature can raise them without voter input, you know, I think it's time probably for a change. - Awesome, well, thanks for coming and explaining it to us. I learned a lot in reading the paper, so I appreciate it, and we'll have to have you back to talk about it more. - Yeah, thank you very much. (upbeat music) (upbeat music) (upbeat music) (upbeat music)