Proposed Supermajority Requirement to Increase Taxes at Odds with Sound Fiscal Policy
Supermajority Requirement Not Sound PolicyThe New Hampshire House of Representatives recently approved a measure, CACR 6, to amend the state’s constitution to require a three-fifths vote in both chambers of the legislature in order to increase any existing tax or license fee, create a new tax or license fee, or authorize the issuance of state bonds. The experiences of other states with similar restrictions in place, as well as academic research, suggest that a “supermajority” requirement for tax increases would undermine sound fiscal policy in New Hampshire. Moreover, given New Hampshire’s historically low level of taxation, such a requirement seems to be a solution in search of a problem.
In particular, the proposed supermajority requirement:
Would increase the likelihood that the legislature will resort to one-time fixes or accounting gimmicks to address future budget shortfalls.
As the past few years evince, state budget deficits tend to emerge during economic downturns: tax collections typically decline, while the demand for public services generally either remains constant or grows, leading to a gap between revenue and expenditures. Under such circumstances, policymakers face a limited set of choices. They can take steps to reduce spending; they can adopt measures to generate additional revenue in a sustainable fashion; or they can turn to temporary solutions that may lead to larger shortfalls down the road, such as shifting costs from one fiscal year to the next or converting ongoing revenue streams, such as tobacco settlement payments, into lump sums to cover current costs. Erecting procedural barriers to tax increases, as the supermajority requirement would do, thus means that policymakers would either have to enact deeper spending cuts than would otherwise be the case or would have to rely upon short-sighted accounting gimmicks to bring revenue and expenditures into balance. As deep spending cuts can have adverse economic consequences, the pressure becomes that much greater to resort to policy options that offer some fiscal relief in the short-run, but that create fiscal stress over time.
The experience of other states with supermajority requirements during the recent recession is instructive. Arizona mandates that any tax increase receive the votes of two-thirds of its legislature or be directly approved by the public. In 2010, due in part to the difficulties created by this requirement, the state, in the face of a multi-billion dollar budget deficit, entered into a variety of agreements to sell state buildings, including the Arizona State Capitol and the Arizona Supreme Court, and then to lease them back over time.[i] While this generated roughly $1 billion in funds to help close its budget gap, Arizona will pay the price for such gimmicks in the form of higher lease costs for years to come. More broadly, a recent study by the Pew Center on the States identified ten states under particular fiscal duress in the wake of the recession. Of those states, six – California, Arizona, Michigan, Oregon, Nevada, and Florida – imposed some form of supermajority requirement to raise taxes.[ii]
Would empower a very small number of legislators to block action on important priorities.
Proponents of a supermajority requirement argue that such a requirement would ensure that the decision to increase taxes or fees would reflect broad consensus among members of the legislature and would promote compromise on fiscal matters. In reality, though, a supermajority requirement would cede control over any number of important priorities to a minority of the legislature. In the case of New Hampshire, ten individuals – the number of Senators required to keep that 24 member chamber from achieving a three-fifths supermajority – could forestall passage of a tax increase. Worse still, they could also delay or halt consideration of other critical legislation, such as the state budget, as they withhold their backing of a tax increase in exchange either for support for state projects in their own districts or for concessions on other, potentially unrelated issues.
Would inhibit the reconsideration of tax cuts.
Every state policy, whether dealing with criminal justice, elections, the environment, or taxation, is worth reevaluating from time to time. For instance, tax cuts that were enacted during a period of economic growth and that appeared affordable at the time, might, during a recession, prove to be too great a change in the state’s revenue stream. Yet, the proposed supermajority requirement would pose an enormous obstacle to any such reassessment, since even an effort to restore a given tax rate to its prior level would be deemed a tax increase. Tax incentives created in the name of economic development and later found to be ineffective in fostering employment or bolstering incomes would likely remain enshrined in the state’s tax code as well, for precisely the same reason. Indeed, the bipartisan California Citizens’ Budget Commission recognized some time ago the problem that supermajority requirements pose for eliminating wasteful tax incentives. In a 1998 report, the Commission concluded that the Golden State’s two-thirds supermajority standard for passing tax increases “makes it relatively easy to enact tax breaks but difficult to repeal them” and subsequently recommended that California’s constitution be altered so that the legislature could reform or repeal tax incentives by a simple majority vote.[iii]
May lead to higher borrowing costs for the state.
A key determinant of the interest rates that New Hampshire must pay – and, by extension, the costs it must incur – when it borrows money through financial markets is the rating assigned to its bonds by agencies such as Standard & Poors or Moody’s Investors Service.
The adoption of a supermajority requirement for future tax increases could harm New Hampshire’s perceived credit-worthiness, as ratings agencies generally view such requirements as constraining states’ abilities to repay the funds they have borrowed. As a result, they may assign less positive ratings to the bonds issued by the states that impose such requirements. For instance, in downgrading Arizona’s bond rating last year, Moody’s Investors Service noted that its assessment reflected, among other factors, “…a requirement for a 2/3 majority vote of the state legislature or vote of the people to increase revenues.”[iv] Moody’s similarly cited Nevada’s two-thirds supermajority requirement in lowering that state’s bond rating just last month, observing that it “presents a hurdle to achieving balance on an ongoing basis going forward.”[v] Even more importantly, a comprehensive 1999 study of the relationship between limits on states’ fiscal policy processes and the borrowing costs they incur, conducted by James Poterba of the Massachusetts Institute of Technology and Kim Rueben of the Urban Institute, found that states “that restrict tax increases or require supermajorities to increase taxes face higher borrowing costs.” Poterba and Rueben further determined that such states are “likely to face borrowing rates more than seventeen basis points higher than those in other states,” a difference that is equal to “an extra $1,750 in interest payments per million dollars of debt issued.”[vi]
In an effort to respond to concerns about the consequences of a supermajority requirement for New Hampshire’s bond rating, the House of Representatives, during its consideration of CACR 6, amended the measure to direct the State Treasurer to withhold any general funds necessary to repay the interest or principal on state debt, should the legislature fail to appropriate such funds. Nevertheless, it is unclear how such a stipulation differs, in substance, from the state’s existing obligation to meet debts to which it has pledged its faith and credit and, in turn, what degree of reassurance such a stipulation might offer to ratings agencies or to bond holders. Moreover, in setting their ratings, bond agencies presumably account not only for a state’s immediate capacity to repay a given loan, but also the extent to which it must avail itself of borrowing to finance the operations of government. As noted above, the imposition of a supermajority requirement increases the likelihood that a state will turn to temporary solutions, including borrowing, to balance revenue and expenditures.
Attempts to respond to a problem that does not exist.
The ostensible purpose of the proposed resolution is to make the enactment of future tax increases more difficult and, by extension, to keep taxes in New Hampshire low. Yet, the level of taxation in the Granite State is already exceptionally low — and has been for some time – even in the absence of a supermajority requirement.
Data from the US Census Bureau and the US Bureau of Economic Analysis indicate that total state and local taxes in New Hampshire equaled 8.7 percent of personal income in FY 2008. By this measure, New Hampshire had the next to lowest level of taxation in the country in FY 2008, ranking 50th out of the fifty states and the District of Columbia. Only South Dakota – where state and local taxes were 8.1 percent of personal income – had a lower level of taxation, in the aggregate, that year.[vii]
What’s more, New Hampshire’s comparatively low level of taxation has persisted for decades. In FY 2008, total state and local taxes for the country as a whole amounted to 10.9 percent of personal income – or more than two percentage points above the corresponding level in New Hampshire. With the exception of the mid-1990s, that
roughly two percentage point difference between New Hampshire and the nation overall has held since the late 1970s. Over the same period of time, only twice – again, in the mid-1990s – did the level of taxation in New Hampshire rise to the point where the state was not among the ten lowest states in the nation.
Conclusion
In sum, the proposed supermajority requirement is inimical to sound fiscal policy. It would unduly constrain the flexibility New Hampshire needs to respond to changing economic circumstances or to shifting public preferences and would likely lead to a greater reliance upon temporary solutions to future budgetary shortfalls, more frequent legislative stalemates, and higher borrowing costs. New Hampshire has one of the lowest levels of taxation in the nation, even in the absence of such a requirement. Consequently, instituting a supermajority requirement seems, at best, unnecessary and, at worst, harmful to the state’s long-term fiscal condition.
Endnotes
[i] National Conference of State Legislatures, Actions & Proposals to Balance the FY 2010 Budget: Other Revenue Actions, Taxes/Fees, available at http://www.ncsl.org/default.aspx?tabid=17252.
[ii] Pew Center on the States, Beyond California: States in Fiscal Peril, November 2009, available at: http://downloads.pewcenteronthestates.org/BeyondCalifornia.pdf
[iii] Center for Governmental Studies, A 21st Century Budget Process for California: Recommendations of the California Citizens Budget Commission, 1998, available at http://www.policyarchive.org/handle/10207/bitstreams/219.pdf
[iv] Moody’s Investor Services, Global Credit Research Press Release, “Moody’s Downgrades Arizona’s Issuer Rating to Aa3 from Aa2”, July 15, 2010
[v] Moody’s Investor Services, Global Credit Research Press Release, “Moody’s Downgrades State of Nevada’s General Obligation Bonds to Aa2 from Aa1”, March 24, 2011
[vi] Poterba, James M. and Rueben, Kim S., Fiscal Rules and State Borrowing Costs: Evidence from California and Other States, Public Policy Institute of California, 1999, p. vi.
[vii] New Hampshire Fiscal Policy Institute, An Overview of New Hampshire’s Tax System, December 2010, p. 15-16.
