Report State Budget

Is a State Spending Cap the Right Approach for New York?

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October 11, 2010

New York’s ongoing budget crisis has prompted leaders and candidates to call for a cap on state spending. Citing Albany’s consistent record of significantly increasing spending in good and bad times, they want future spending to grow no more quickly than the national inflation rate.

For New York State, this would be a remarkable reduction in the rate of spending. Over the past 25 years, the state operating budget has increased at an average annual rate of 5.4 percent, far outpacing the average national inflation rate of 2.9 percent and the 4.8 percent average annual growth in personal income New Yorkers have experienced over the same period. The rate of spending growth has topped revenue growth, even in some years when the economy and tax collections were booming, leading to a habit of relying on “one‐shot” measures, tax increases and borrowing. This pattern has led to large future budget gaps.

Over the last four decades, 30 states have enacted some form of tax or spending limit at the state level. It is instructive for New York’s policy makers to examine the experience of those states before committing to a formula‐based spending limit. The results in many of these states suggest that the goals of a cap should be clearly defined and consideration should be given to the possible consequences and problems that may arise from a cap.

A review of other states’ experiences with spending caps indicates that most have had little to no effect on government spending unless paired with similar limits on local governments. In states that do not apply restrictions at the local level, lawmakers usually find ways to shift the locus of tax collection and spending.

When spending caps are effective in curbing state spending they typically work in tandem with other limits on government including local property tax caps, local spending limitations, strict balanced budget requirements and state revenue caps. All of these are in place in some form in Colorado – the state credited with having the most stringent and most complicated tax and spending caps. Colorado’s Taxpayer Bill of Rights (TABOR) sets a strict limit on state revenue growth as well as spending. But Colorado’s story also carries a caution for New York. The state’s multiple tax and spending limitations, built up over decades, have led to unintended budgetary imbalances and prevented lawmakers from responding effectively to economic decline. Colorado’s cap problems grew so severe by 2005 that voters, urged on by a Republican governor who had refunded billions to taxpayers under TABOR in flush times, suspended the cap requirements for five years.