Cap state spending: the next new wave?

Pumped up in part by the public-relations offensive of a former bodybuilder - California Gov. Arnold Schwarzenegger - an initiative may be muscling its way back to the top of statehouse agendas: spending caps.

The idea: keep state governments from spending more than they take in. Known as TEL (tax and expenditure limitation), it has moved front and center in California, which will vote on the measure this fall, and in Ohio, which is considering doing so. Maine and Oregon are preparing initiatives for 2006. Conservative groups are poised to follow suit in 20 other states.

Some national observers see this as the beginning of a grass-roots rebellion remarkably similar to the tax-revolt brushfire that swept through California, Massachusetts, and other states 20 years ago. That movement limited how much states could tax. This one aims to curb how much they spend.

"There are all kinds of renewed focus on the public dollar in several states because people are being hit with all kinds of changes from population to industry and jobs, which affect budgets all the way down to the local level," says Bert Waisanen, a senior policy specialist for the National Conference of State Legislatures (NCSL). Twenty-three states already have spending limits, four have tax limits, and three have both.

Although state revenue performance has been improving in recent months, budget shortfalls are widespread in nearly half the states. That is prompting calls to create ways to buffer programs and services from the dramatic ups and downs of tax income tied to economic spikes.

The new impetus comes more from citizens than legislatures. Although Georgia, Missouri, Tennessee, and Wisconsin have seen significant lawmaker support for such measures, 23 other state legislatures have raised the issue, and then done nothing.

"Citizens want to figure out how better to find ways that government can function without ... locking into programs that are suddenly too expensive when revenues fall off," Mr. Waisanen says.

Some also see the agenda of national, fiscal conservative groups trying to create buzz for conservative candidates in an off election year, and to generate enthusiasm for a federal spending cap that can limit costly entitlements like Medicare and Medicaid.

"You are seeing this come up on the radar in state after state because there is a feeling that we have gotten a handle on dealing with taxes and how to discipline that, but we have not come to grips with spending," says Grover Norquist, president of Americans for Tax Reform, a leading antitax advocacy group. The damage of runaway spending is evident in states from Washington to Michigan, he says.

Known in California by the appealing populist-title, "Live Within Our Means Act," the idea is to keep spending from growing faster than tax revenues. "Did you know that for every dollar the state takes in in California, our legislators spend $1.10?" asks Governor Schwarzenegger in a ubiquitous TV ad that has played for months. Repeating one of his most oft-heard claims from the Gray Davis recall election of 2003, his campaign also reiterates one of the mantras of spending-cap proponents: "We don't have a revenue problem, we have a spending problem."

The comment refers to the practice by the Davis administration of tying program funding to state revenue levels that had soared in the heady days before the dotcom bust. When the bust happened and revenues fell and program funding did not, the state went billions into the red.

"When Arnold took over and tried to get the budget under control, he realized that so much of the pie was already spoken for," says Elizabeth Garrett, a political scientist at the University of Southern California. "This initiative is a way to get more control of spending in a way that avoids having to fight over which programs win."

According to the new initiative, "the state has borrowed billions of dollars from schools, transportation funds, and local governments. The constitution should prohibit such budgetary gimmickry...."

Opponents of the California measure are expected to be those interest groups whose programs will probably go on the chopping block when new formulas kick in. In the case of California, one such entitlement is K-12 education, which by law must get 40 percent of the state's general fund.

"The phrase, 'living within your means' has very strong populist appeal, but the flip side is when every interest group in the state which feels it might have its pet programs cut digs in," says Daniel Smith, a political scientist at the University of Florida who has written two books on taxes and direct democracy. "They stand up and say, 'Look around at what's happened to our schools, our highways, fire, and police stations.' They also have a very powerful argument."

He and others hold up the example of Colorado, which has had a 10-year-old spending cap that is now squeezing spending enough that the same governor who once touted the idea is now urging voters in a fall initiative to lift the cap for five years.

"Many counties in Colorado and other states are really hurting from decreased revenues, so I see that as preventing the same kind of nationwide rush to do this that we saw with Prop. 13 in 1978," says Mr. Smith.