How States Can Control Their Spending

State governments across the country have, over the years, adopted more than a dozen types of institutions to help limit spending, limit the growth of spending, or limit the volatility of spending. Examples include strict balanced-budget requirements, line-item vetoes, and tax and spending limits. Unfortunately, most reforms have yielded disappointing results.

Which measures have succeeded the most? According to Matthew Mitchell and Nick Tuszynski (both with the Mercatus Center at George Mason University), two institutions have been clearly effective in helping state governments get their spending habits under control: the item-reduction veto and separate spending and taxing committees (“Institutions and State Spending: An Overview,” The Independent Review, Summer 2012).

How—and how well—do they work? An item-reduction veto is more powerful than a line-item veto. A cunning legislature can diminish the threat of a line-item veto by making the governor an offer of take-it-or-leave-it, requiring him or her to put more political capital at risk during negotiations. In contrast, an item-reduction veto lets a governor decide how much to reduce spending in particular program areas, enabling him or her to negotiate spending reductions more effectively. States with an item-reduction veto reduced spending per capita by $451, compared to $100 for those with a line-item veto. (All of Mitchell and Tuszynski’s estimates are in 2008 dollars.)

Having separate spending and taxing committees is even more effective. The reason may be one of incentives: Because tax-committee members can’t easily steer spending toward their own constituents, they have weaker incentives to favor spending bills. Whatever the reason, the fiscal effects of this institution are huge: the most recent study (conducted by Mark Crain and Timothy Muris and published in the Journal of Law and Economics in 1995) found that separate spending and taxing committees were associated with spending reductions amounting to $1,241 per capita. (For a visual comparison, see the accompanying figure, taken from Mitchell and Tuszynski’s article.)

Although item-reduction vetoes and separate spending and taxing committees show the greatest effectiveness, Mitchell and Tuszynski note that further investigation may be warranted: these are among the least-studied state fiscal institutions, and some institutions are effective in some circumstances but not in others. “Nevertheless,” they conclude, “policymakers interested in arresting the unsustainable growth of government already have a number of tools at their disposal.”