Do Taxpayer Protection Laws Work?

Ontario Finance Minister Greg Sorbara’s first kick at the fiscal can resulted in what can only be described as a classic 1960s budget: major-league spending increases financed by tax hikes and deficits. By raising taxes and running a deficit, the Liberal government contravened both the Balanced Budget and Taxpayer Protection Acts. Mr. Sorbara casually, and quite dismissively, stated that those laws would simply be changed or eliminated. The substitute legislation, laid out in principle in one of the budget documents, will unfortunately offer none of the protections of the old laws.

Equally worrying, the Ontario Liberals’ actions have led some to the conclusion that laws enacted to protect taxpayers simply don’t work because they can be so readily altered to fit current circumstances. The reality of taxpayer protection laws, more commonly referred to as Tax and Expenditure Limitation (TEL) laws, is that they do work effectively, if designed and implemented properly.

The utter failure of Ontario’s Taxpayer Protection Act to actually provide protection from tax increases is a result of its statutory legal nature. A major review of TELs, published last year by The Fraser Institute, found these laws do work but that their effectiveness is based almost entirely on their design. The study relied on US experience, where some 27 US states maintain some type of legal restriction on government spending and/or taxes.

One of the key findings is that TELs must be constitutional in status. This is particularly relevant to the current debate in Ontario. Constitutionally entrenched TELs are more difficult to change than statutory laws and simply do not afford governments the easy option of altering laws when circumstances change.

Much confusion exists with respect to the ability of Canadian provinces to implement constitutional constraints. After all, unlike US states, none of the Canadian provinces have independent, stand-alone constitutions. There are, however, options available to the provinces to amend the national constitution in such a way as to only affect a single province.

For instance, a province can pass a law with the federal government concurrently passing the same law, effectively altering the national constitution. Such a process is referred to as a bilateral amendment to the Constitution and is permitted under section 43 of the Constitution Act.

Another less stringent option exists under section 45 of the Constitution Act. It permits provinces to unilaterally implement changes to the constitution that affect only that same province. In addition, if the original provincial law was supported by a referendum, constitutional convention could require that a subsequent referendum be held to overturn the TEL. All of the above make it more difficult and time-consuming to change TEL laws and, thus, make TEL laws themselves more effective.

The potential benefits of a constitutional TEL in Ontario are quite clear. The McGuinty government would have been precluded from increasing taxes as they did, unless they had specifically included such a proposal in their election platform or held a referendum. In addition, the eye-popping spending increases, particularly when the true size of the deficit is considered, would have been mitigated, since TELs impose spending growth limits unless approved by referendum.

The only remaining option for the government would have been to manage its resources wisely, based on spending restraint and setting policies that encouraged economic growth; neither of these ends was achieved in the Ontario budget.

In fact, TELs could have prevented the current problem from arising at all. Spending restraint in the previous two years would have certainly limited the size of the current deficit, thus reducing the need for large spending cuts or equally as large tax increases.

Colorado provides a living example of just how well constitutionally entrenched TELs work. The state enjoys one of the better-designed and most effective TELs in the US. Colorado’s tax and expenditure limitation applies to both revenues and spending and voters must approve any new or increased taxes, except for emergencies. Revenues exceeding a prescribed limit must be refunded to taxpayers.

The results have been remarkable. Like most US states, Colorado experienced large increases in state revenues throughout the 1990s. The difference between Colorado and other US states during that decade was that Colorado was forced through its TEL to reduce taxes and return budget surpluses to taxpayers since spending could not outstrip population growth plus inflation. As a result, Colorado’s economy remains healthy today - with no fiscal crisis looming (as is the case in many US states) - and its citizens enjoy one of the highest after-tax incomes in North America.

Taxpayer protection laws do indeed work when properly designed and implemented. Many US states, and notably Colorado, have benefited enormously from TELs, which limited spending during boom times and now limit tax increases. Such restraints would prove equally as beneficial in Canada. For people in Ontario, though, it is back to the drawing board on the issue of taxpayer protection. Let’s hope that next time, laws intended to protect average citizens from a more intrusive government are constitutionally enacted.