Questions and Answers on the Taxpayer Bill of Rights

Read the full report | Q: What is the Taxpayer Bill of Rights?

A: The Taxpayer Bill of Rights will set speed limits on the growth in state and local taxes and spending. First, any net tax increase that exceeds 0.01 percent of general fund revenue ($304,074 in FY 2008) will require a majority vote of each House of the Legislature AND a majority approval of the voters.

Second, the annual growth in expenditures, including the General Fund, the Highway Fund and Other Special Revenue Funds, are limited to the increases in population (3 year average) plus inflation. Exceeding the limit will require a majority vote of each House of the Legislature AND a majority approval of the voters. Otherwise, any excess revenue over the limit is automatically distributed into a Budget Stabilization Fund (20 percent) and a Tax Relief Reserve Fund (80 percent).

The Budget Stabilization Fund may be used when revenues are not sufficient to fund the level of expenditures permitted by the growth limits; however, it cannot be used to exceed the growth limits. The Tax Relief Reserve Fund must be used to reduce tax revenue. If the Legislature does not proactively reduce taxes, then the Taxpayer Bill of Rights mandates tax refunds based on the number of personal exemptions claimed on the taxpayer’s previous individual income tax form.

For local governments, the annual growth in expenditures is limited to the current LD 1 formulas—except that expenditure growth can never exceed real personal income plus inflation. Since property taxes are set based on expenditures, there is no separate limit on tax increases at the local level.

Q: Why do we need a Taxpayer Bill of Rights?

A: Chart 1 illustrates the need for a Taxpayer Bill of Rights by showing the comparative growth rates in state and local government expenditures, personal income and population plus inflation between fiscal year (FY) 1960 to 2006 (the earliest and latest data available, respectively). The FY 2006 growth index for state and local expenditures is 54.1 percent higher than the growth index for personal income and 324.4 percent higher than the growth index for population plus inflation. More disturbingly, the gap between them is growing larger. Clearly the future growth in state and local expenditures will have to be slowed if personal income is ever going to catch up.