Guest Author
Thanks to legislative action, Floridians will vote this fall on a constitutional amendment subjecting any increase in fees or taxes — whether state or local — to a 2/3 supermajority vote by the requisite legislative body. Florida is already one of 17 states imposing at least some sort of supermajority requirement on tax increases.
But currently, such a limitation (a three-fifths supermajority) only applies to increases in the corporate income tax rate above 5 percent.
This bold decision would further cement the state’s position as an economic powerhouse. Let’s explore the rationale for such taxpayer protection.
Supermajority requirements counteract the propensity of some legislators to levy higher taxes on a minority of residents under the auspices of providing more services to others. Unfortunately, those dollars forcibly contributed to the state are no longer available for investment in the economy. Politicians may escape widespread criticism for the tax increase — and may actually receive acclaim for the perceived boost in services.
However, economic opportunities are diminished by soaking up available capital for investment and by disincentivizing additional output by those taxed.
Over the long term, data show low-tax states enjoy more rapid economic growth and even greater growth in tax revenue than their high-state counterparts. A supermajority requirement for tax hikes keeps the inclination to raise taxes for political gain in check.
Unfortunately, tax increases often prove far easier to implement than meaningful tax cuts because of a divide and conquer political approach. Sometimes a narrow slice of the populace that will disproportionately benefit from increased spending will place outsized pressure on politicians in support of tax increases.
This especially occurs when the tax increase will only impact a relatively limited number of taxpayers or if a broad-based tax increase is hidden or fairly negligible on any one entity. Regardless of the political dynamics, economic growth overall is negatively impacted. Compounded over time, a series of such tax increases severely constricts opportunities.
A supermajority requirement prevents this tendency of tax hikes to gradually ratchet up.
Temporary shifts in political winds often threaten to erase the hard-fought gains of past reforms. This is particularly important for entrepreneurs and companies. Investors seek to risk their capital only on ventures with an expected rate of return exceeding a certain required risk-adjusted level. After all, not all ventures will prove successful.
As such, the higher the tax rate, the lower expected after-tax return for all projects.
Some ventures with a previously acceptable risk-adjusted expected rate of return will no longer qualify as an acceptable investment given a higher tax rate. Fewer acceptable investment options results in fewer employment opportunities for residents statewide. A supermajority requirement for tax hikes provides job creators greater peace of mind to make these desirable long-term investments by safeguarding pro-growth reforms and enhancing expectations that a state’s business climate will be stable.
Of course, some argue that supermajority requirements kneecap a state from making needed investments in the future. This ignores the fact that even in the absence of a tax rate increase, long-term, real (inflation-adjusted) per capita revenue growth occurs with only temporary, modest interruptions.
This occurs thanks to an economy in the United States which grows nearly each and every year in economic output per capita. Innovation combined with ever-expanding capital deployment ensures this growth.
It’s the reason the standard of living — measured by such things as house size, vehicles per family, food consumed, and appliances — continues to increase for all economic classes. Even a stable tax rate yields more revenue adjusted for inflation with such growth.
Others complain that a supermajority requirement can hamper needs, such as teacher salaries, during times of economic crises as revenue plummets. But if states handle times of surplus correctly, a rainy-day fund can provide temporary needed funds to close a budget gap.
Remember, during economic expansion, real per capita revenue increases even with a stable tax rate. Some of this excess revenue should be diverted into savings in order to supplement spending during times of economic crises.
At any rate, a supermajority of legislators may still enact a tax increase if the circumstances are dire enough.
A supermajority requirement spared Californians from tax increases even more draconian than those recently approved by a far-left legislature. In Colorado, other restrictions on legislative tax increases have helped maintain property taxes at only a fraction of those imposed in states such as New Jersey.
More than a dozen other states, red and blue alike, continue to maintain these requirements. Such safeguards wisely protect taxpayers from future politicians overly zealous to extract more from their wallets.
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Joel Griffith is director of the Center for State Fiscal Reform at the American Legislative Exchange Council. Jonathan Williams is chief economist at the American Legislative Exchange Council.
