SJR 2-CONST AM: APPROPRIATION LIMIT  3:37:42 PM CHAIR DUNLEAVY called the committee back to order. He announced the consideration of SJR 2. He welcomed invited testimony and announced that Mr. Penn Pfiffner from the TABOR Foundation will be the first to address the committee. He detailed that Mr. Pfiffner is a state representative from Colorado's legislature and has served for eight years. He detailed that Mr. Piffner's major bills included the enhanced sentences for dangerous pedophiles, the state's full restitution policy, repealed the capital gains tax revision, created performance-based pay for state employees, and wrote major deregulation bills. He added that Mr. Pfiffner has taught college economics part-time for 13 years, earned a master's degree in finance from the University of Colorado, and currently serves as the chairman of the TABOR Committee and its sister organization the TABOR Foundation. 3:38:49 PM PENN R. PFIFFNER, Chairman, Taxpayer's Bill of Rights (TABOR) Committee, Lakewood, Colorado, testified in support of SJR 2. He opined that SJR 2 will receive pushback from people who want to see bigger and bigger government without restriction. He suggested that SJR 2 be recognized as a spending limitation rather than a repeat of Colorado's TABOR. He pointed out that Colorado's TABOR is more ambitious with a larger reach. He noted the differences between TABOR and SJR 2 as follows: · SJR 2 is state-only where Colorado's TABOR has a restriction on every level of government. · SJR 2 has no restriction of debt. · SJR 2 has 14 exceptions. · SJR 2 is silent on the rebate of taxes that are collected above the cap. · SJR 2 does not have election provisions. He remarked that resetting a spending cap with SJR 2 makes a great deal of sense because there is not much point of having a cap that is ineffective. 3:41:13 PM He contended that Alaska's effective appropriations cap will mirror that of Colorado's positive experiences. He said the overarching concept is to strike a healthy balance between family budgets and public goods which results in citizens and elected officials asking the right questions. He opined that having a good spending limitation forces people to ask questions that are related to prioritizing within a given budget rather than trying to fund wild dreams. He set forth that the value of everyone living within a budget extends to government with smart and fair measures that limits taxes and expenditures limitations such as SJR 2. He said Colorado has seen a very successful economy and noted that the state did not have a successful economy before 1992. He stressed that he was not suggesting causation as much as recognizing that some of TABOR's opposition claimed that it would damage the state's economy. He pointed out that Colorado has a roaring economy. MR. PFIFFNER noted that Colorado has program stability by recognizing the natural inclination for government to grow too fast in good times and to over promise and set up the base that is far too high when fiscal challenges come. He said Colorado has seen its fiscal crises limited, especially when compared to states such as California and Illinois, states that have grown their budgets immensely and then had to adjust to fiscal challenges. 3:44:21 PM He addressed typical challenges to government limitation where budgets and K-12 spending will be damaged. He disclosed that Colorado's fiscal and spending policies have compared favorably to its neighboring states. He added that naysayers have said Colorado does not have enough money, but noted that Colorado is one of four states that spends more on a local basis than on a state basis. 3:47:43 PM He addressed SJR 2 and opined that some things have been done that he thought would help gain support and allow citizens to understand the measure better. He opined that there really is no issue about rebasing to a lower level. He disclosed that Colorado has dealt with a troubling aspect through the courts to its voter approval requirement for new taxes where "fees" are used. He said SJR 2 avoids the "fee" problem. He added that states with successful expenditure limitations place them in their constitution and SJR 2 does that. He summarized that SJR 2 takes the right step as a good and effective measure. CHAIR DUNLEAVY stated that he wanted to contrast what Colorado has done and what SJR 2 tries to accomplish. He asked if Colorado's TABOR exists on both state and local levels. MR. PFIFFNER answered correct. He pointed out that Colorado's TABOR pertains beyond what Chair Dunleavy queried. He detailed that Colorado has more than 3,400 special districts, mostly for road, water and sewer, in addition to library and cemetery districts. 3:51:42 PM CHAIR DUNLEAVY noted that SJR 2 strictly pertains to state spending. He asked if in Colorado, any type of revenue measure must be voted on by the people. MR. PFIFFNER described Chair Dunleavy's query as an overstatement. He explained that new taxes, sunsetting taxes and an increase in tax rates must be approved by voters, but fiscal policy modifications that do not result in an increase in revenues are exempt. He added that pension plan funding and items that deal with fees are also exempt. CHAIR DUNLEAVY asked if the same guidelines apply to local and district levels as well. MR. PFIFFNER answered correct. He detailed that local districts specify their need for more debt or raising taxes and pointed out that local measures have passed more than 80 percent of the time. 3:54:24 PM BARRY POULSON, Emeritus Professor of Economics, University of Colorado, Boulder, Colorado, testified in support of SJR 2 with added provisions. He detailed that he is also an advisor to the American Legislative Exchange Council (ALEC). He disclosed that Chair Dunleavy asked him to address Colorado's "Taxpayer Bill of Rights" (TABOR) and experience with "Tax and Expenditure Limits" (TEL) in other states. He explained the Colorado's history with TELs as follows: · Colorado was one of the first states to introduce a TEL in the 1970s. · Colorado's TEL in the 1970s was not effective because state legislators chose to exempt major parts of the budget from a limit. · Colorado's spending was not constrained in the 1980s and the state was a lot like California where government spending grew more rapidly than the private economy. · Colorado's TABOR constitutional amendment initiative was enacted in 1992. He said TABORs turned out to be one of the most effective tax and spending limits in the country through substantive constraints and procedural constraints. He detailed that substantive constraints limit the growth of spending by any jurisdiction to the sum of inflation plus population growth. He added that any revenue above the limit must be rebated to taxpayers. He specified that procedural constraints require voter approval for any increase in taxes, tax-base, or increase in debt. He disclosed that Colorado's TABOR resulted in surplus revenue in the late 1990s where over $3 billion was rebated to taxpayers. He added that the TABOR set the stage for significant tax reductions at all levels of government where Colorado ended up with one of the best business tax climates that resulted in the state experiencing the second highest rate of economic growth of any state in the country. 3:58:27 PM MR. POULSON detailed that Colorado ran into problems with TABOR in 2001 when the state experienced a sharp recession with an 18 percent fall in revenue that resulted in the "ratchet effect" where surplus revenue was rebated to taxpayers prior to the state fully recovering from the recession. He disclosed that a referendum in 2005 resulted in a timeout for TABOR from 2005 through 2009 and TABOR was applied again in 2010. He pointed out that Colorado's economy recovered well from its recession and the state is now growing more rapidly than most other states. He opined that Colorado's positive tax climate has been a significant factor in the state's rapid recovery and economic growth. He addressed procedural limits in TABOR regarding voter approval for increased taxes, tax-base, and debt at all level of government. He said for two decades, Colorado citizens have been voting on hundreds of measures proposing increased taxes and increased debt. Measures at the municipal level have passed about 50 percent of the time, but at the state level taxpayers have been more stringent. He disclosed that only two minor-tax increases and a debt increase have been approved over the past two decades. He set forth that citizens have been able to constrain the growth of government significantly at all levels and especially at the state level because of both the procedural limits and the substantive limits in TABOR. He reiterated that he serves as advisor to ALEC and disclosed that model legislation for tax and spending limits was drafted by ALEC using Colorado's TABOR as a model. He detailed that refinements were made in ALEC's model legislation to include providing for an emergency fund and a capital fund via surplus revenue. He added that additional surplus revenue is rebated or offset by tax cuts. 4:02:39 PM He opined that Alaska's TEL is poorly designed and as a result the limit has increased more rapidly than state revenue so the TEL never constrains anything. He said a TEL must be carefully designed to achieve a desired result. He concurred with Mr. Pfiffner that SJR 2 appears to be a well-designed tax and spending limit that will be much more effective than the TEL that Alaska currently has in place. He opined that imposing the limit on appropriation based on population growth and inflation will constrain the growth of state spending very effectively in addition to providing a much more stable spending growth over the business cycle. He said Alaska, like many energy states, has revenue volatility that results in spending volatility. He said SJR 2 is an important step in the right direction. He added Alaska's emergency fund and capital construction fund should also assist in what the state is attempting to achieve. 4:04:27 PM MR. POULSON addressed problems that Alaska might expect with SJR 2 as follows: · TELs often put pressure on the state to fund programs with fees. · SJR 2 only constrains spending at the state level. He suggested that the state address "fees" by having a very strict definition of user fees and distinguish user fees from taxes so that the state is sure to only restrict tax revenues and expenditures. He added that unfunded mandates should be limited by the state on local governments and suggested that the restriction be included in SJR 2. He recounted that he has suggested in the past that Alaska legislators consider requiring a procedural limit that would require voter approval for increased taxes and debt. He noted that he has been told that his suggestion was a step too far. He said legislators should reconsider his voter-approval suggestion as either part of SJR 2 or as separate legislation. He asserted that the procedural limits that require voter approval for increased taxes and debt have proven to be very important in Colorado and other states. He opined that the procedural limits really do allow citizens to determine how much government they want and how much they are willing to finance in terms of government spending. He pointed out that outside of the U.S., citizens of Switzerland have been voting on increased taxes and debt for more than a century and they have created one of the strongest fiscal systems in the world. 4:07:50 PM CHAIR DUNLEAVY asked that Mr. Poulson explain how TABOR has either negatively or positively impacted Colorado's private economy. MR. POULSON replied that he often answers Chair Dunleavy's question by contrasting Colorado and California. He explained that Colorado and California had very similar government spending patterns in the 1980s where government spending grew much more rapidly than the state economy; in fact, both states introduced tax and spending limits. He disclosed that California gutted their tax and spending limits by shifting many state programs and expenditures off budget to avoid tax and spending limits. California ultimately experienced a continued rapid growth of government spending where the state ended up with high deficit and debt levels where their economy has underperformed over the last two decades comparted to Colorado. He said his experience is that with an effective tax and spending limit in place, Alaska can create a better business-tax climate with the right incentives created for business investment and growth, a scenario that Colorado continues to do due to the success of constraining government growth. 4:09:57 PM CHAIR DUNLEAVY asked if Colorado's improved business climate is due to businesses not having to worry about a predatory tax regime. MR. POULSON answered yes. He disclosed that Colorado's tax climate rates among the top-ten states in terms of business climate. He opined that TABOR allows citizens to decide how much taxes they are willing to pay, how much spending they are willing to incur, and how much government they want and are willing to pay for. CHAIR DUNLEAVY asked Mr. Poulson to address Colorado's debt and how it relates to having TABOR in place. 4:12:33 PM MR. POULSON admitted that the state has figured out a way around debt limits. He explained that Colorado's original constitution prohibited any new debt without citizen approval. He detailed that state and local governments have used non-general obligation debt; for example, certificates of participation designate a specific revenue stream to pay off debt and the courts have ruled that the debt is not a general obligation debt and therefore not subject to the TABOR limit or to the original constitutional limit. He said Colorado has not necessarily constrained debt in the way that many might anticipate, but the state has limited debt compared to what would have occurred without TABOR. He revealed that Colorado has proposed five different measures over the last two decades to increase debt and only one measure has passed. He remarked that TABOR has been important, but has not been 100-percent successful in constraining debt. 4:14:06 PM CHAIR DUNLEAVY asked Mr. Poulson if TABOR's restraint on Colorado's growth of government has placed more money in citizen's pockets and encouraged new business development. MR. POULSON answered yes. CHAIR DUNLEAVY pointed out that SJR 2 is not based on ALEC's model legislation, but rather a modification of the existing constitutional amendment that has been in place in Alaska since 1982 and reaffirmed in 1986. He reiterated that the amendment was a result of increased government spending when the state started to receive large sums of oil revenue in the 1970s; however, the formula would require $10 billion in unrestricted general funds to hit the limit. He said the idea is to revisit the constitutional amendment to reflect today's new realities to restrain government's growth and encourage investment from other industries. He emphasized that the discussion on SJR 2 will continue. 4:16:22 PM MATTHEW MITCHELL, Senior Research Fellow, Mercatus Center at George Mason University, Arlington, Virginia, testified in support of SJR 2 and provided suggestions on fiscal policies. He disclosed that the Mercatus Center has been studying fiscal policies and institutions that govern them for several years. He detailed that the Mercatus Center has consulted decades of peer- reviewed academic research in addition to their own analysis using comprehensive data sets and the best empirical techniques that are available. He set forth that there are three lessons to concentrate on: 1. Rules matter and rules are often a better alternative to everyday politics: · Sustainable solutions to budget problems require institutional change versus short term remedies. · Institutional change: ¾Changes to the rules that shape the political legislative and budgeting process. ¾States with good institutions or good rules are more likely to make good budgetary decisions. 2. Rule details make a big difference and small changes can set states on very different paths: · Characteristics that make for a good tax and expenditure limit (TEL): ¾Effective TELs have a statistically significant effect on state spending as measured by per capita spending. ¾Effective TELs target spending rather than revenue. Alaska's TEL targets spending. ¾Effective TELs limit budget growth via formula that looks at the sum of inflation and population growth. Alaska's TEL is focused on inflation and population growth. ¾Effective TELs are codified into the constitution, as is Alaska's. ¾Effective TELs require a super majority or public vote to be overwritten, as is Alaska's. A lot of states have tax and expenditure limits that can simply be overwritten with simple majority vote. ¾Effective TELs prohibit unfunded mandates to lower governments, Alaska's does not. ¾Effective TELs immediately refund any revenue collected more than taxpayers' limits, Alaska's does not. Returning money does not provide the state with a chance to spend as well as giving people some "skin in the game" in terms of tax and expenditure limits. · Use an appropriate base by picking a year that is neither extraordinarily high in revenue, extraordinarily tight, or a recession year. The base should be founded on a year where spending was deemed prudent. The base should not be "just the previous year" in order to avoid the "ratcheting effect." Alaska's TEL is based on 1981 and the Legislature should make sure the year is appropriate. 3. Alternative rules for fiscal budgeting other than tax and expenditure limits: · Item reduction vetoes are effective. States that have item reduction vetoes spend less. Alaska has item reduction vetoes. · Separate spending and taxing functions into two separate committees in each chamber. States with separate taxing and spending committees spend between $300 and $400 less per person and tend to spend more prudently. 4:26:48 PM MR. MITCHELL noted that there are some rules that do not always work the way people think they will. He pointed out that states that have biannual budgets spend significantly more than states that have annual budget cycles. He detailed that states with an annual budget cycle spend $120 less person per year. CHAIR DUNLEAVY asked Mr. Mitchell to identify a "model state" that have separate taxing and expenditure committees that seems to work well. MR. MITCHELL replied that Arizona, Colorado, Utah, and Nevada have separate taxing and spending committees. 4:29:06 PM CHAIR DUNLEAVY held SJR 2 in committee.