Budget Process and Reforms

Background

Federal and state governments have tried to change budget rules to control government spending. Budget rules have also been used to impose fiscal discipline. Some of these proposals can erode democratic processes and institutions. And they can eliminate the flexibility that governments need to address changing economic and political circumstances.

Line-item vetoA form of veto that allows the chief executive to reject a particular provisions of a bill without vetoing the entire bill. and enhanced rescission power: Presidents and state governors have requested greater control over spending through use of the line-item vetoA form of veto that allows the chief executive to reject a particular provisions of a bill without vetoing the entire bill. and enhanced rescission power. The line-item vetoA form of veto that allows the chief executive to reject a particular provisions of a bill without vetoing the entire bill., or partial veto, allows chief executives to delete a portion of legislation without rejecting the entire bill. Rescission power allows chief executives to request a cancellation of funds that have been appropriated.

Supporters claim that these changes would reduce the number of special-interest provisions in legislation. They also say it would help control spending. Opponents counter that the savings from these changes would be small. They are concerned that the line-item vetoA form of veto that allows the chief executive to reject a particular provisions of a bill without vetoing the entire bill. or enhanced rescission authority would give too much power to the executive branch. They also say it could result in arbitrary cuts to important programs.

Balanced budget amendment: Federal budget deficits have generated some support for a constitutional amendment to require the federal government to balance the budget. Most state governments have already enacted some form of balanced budget requirement.

A federal balanced budget amendment would be ill-advised. Compared with the states, the federal government needs more flexibility. Economic policy must counteract the effects of economic slowdowns. It must also respond to national emergencies. In addition, such an amendment poses questions of constitutionality. Some previous attempts at creating balanced budget amendments have been found unconstitutional.

Pay-as-you-go: The federal pay-as-you-go (PAYGO) rule requires that all new legislation be paid for within a specific timeframe through tax increases or spending reductions. So-called one-sided PAYGO rules require that any new costs be offset by spending reductions only. Increasing revenue is not an option.

Supermajority requirements: Generally, a simple majority is needed for legislators to pass laws. But some states require a supermajority to raise taxes. The number of votes that constitute a supermajority varies by state. It is not needed to cut taxes or spending. This is problematic because it tilts budget-balancing activities toward spending cuts. These cuts disproportionately hurt lower-income and vulnerable populations, while protecting the tax expenditures that disproportionately benefit higher-income people.

Tax and expenditure limits: Some states and the U.S. Congress have enacted various types of limitations or caps on spending and revenue. This can be problematic. First, caps can result in the use of budget gimmicks to mask true costs. For example, a program’s estimated cost can appear lower when provisions are phased in over time. Long-term costs can be hidden if a policy clearly intended to be permanent is designated as temporary.

Second, such limits can lead to reduced funding for programs critical to vulnerable groups. The effect can be especially harmful to people with low incomes. This is particularly true in cases of across-the-board caps or cuts.

At the state level, one example of strict tax and expenditure limits is the Taxpayer Bill of Rights (TABOR). TABORs place rigid constitutional limits on state government revenues and expenditures. They sometimes affect local governments as well. Limits are based on a formula of inflation plus population growth. Yet, this formula does not allow for the fact that the fastest-growing demographic groups are costly to serve. Among them are older adults and people with disabilities. Nor does it take into account states’ needs to deal with the unexpected such as natural disasters, acts of terrorism, or sudden increases in costs imposed by the federal government.

Independent commissions: Policymakers and others have proposed creating independent bodies to make recommendations for how to close budget gaps outside the regular budget process. Such entities may be useful in educating policymakers and the public and in defining options. Such commissions must be structured in ways to ensure a fair and legitimate process.

BUDGET PROCESS AND REFORMS: Policy

BUDGET PROCESS AND REFORMS: Policy

Line-item veto and enhanced rescission authority

Tax and spending decisions should be the purview of the legislative branch.

Such decisions should not be subject to line-item vetoA form of veto that allows the chief executive to reject a particular provisions of a bill without vetoing the entire bill. and enhanced rescission-power proposals by the executive branch.

Balanced budget amendment

A balanced budget amendment to the U.S. Constitution should not be adopted. It would endanger the nation’s economic health by limiting the government’s ability to address economic and political changes and invest in our nation’s future.

Pay-as-you-go rules

Policymakers should enact effective and balanced rules for fiscal discipline.

If pay-as-you-go (PAYGO) rules are applied, both mandatory spending and revenues should be subject to PAYGO rules.

Supermajorities

Legislators should not adopt supermajority voting requirements for budgetary or tax matters.

Tax and expenditure limits

Governments should not limit their ability to address future economic and political changes and the need for investments. There should be a bias against any effort to limit governments' flexibility in taxing and spending.

Tax and expenditure limits should include:

  • a sunset provision, perhaps of a ten-year duration;
  • a single base year from which all future annual increases would be calculated;
  • annual increases based on population growth (or a similar measure of service load), on inflation, and on changes in economic activity;
  • a requirement that excess revenue be used first to bring rainy-day fundsState budget-stabilization funds that policymakers add to when the economy and therefore tax revenue are strong and spend from when the economy and therefore tax revenue are weak. to adequate percentages of general fund expenditures; and
  • a procedure for refunding surplus revenue, as nearly as possible, to those who paid it.

Discretionary spending caps imposed by Congress should be set at realistic levels and avoid placing unnecessary burdens on programs serving people with low incomes.

Any tax and expenditure limits imposed at the state and local levels should contain provisions that require periodic review, defensible metrics, adequate provisions for future growth, fiscal balance, and equitable plans for distributing surplus funds.

Commissions

Efforts to balance the budget or address shortfalls should remain the purview of the legislative branch. They should be fully negotiated by elected officials.

Any outside body delegated to identify possible budget solutions should take a holistic approach to the topic, follow principles of good governance, and have a diverse and balanced membership.

The following principles should apply to commissions established to address budget balance:

  • Revenues, tax expenditures, and spending should be considered.
  • The conduct of the entity should be fair and transparent.
  • Outcomes should not be preordained.
  • The composition of the entity should be diverse and balanced.
  • The entity should have sufficient powers and resources to achieve its goal.
  • The time horizon for the life of the entity should be clear and realistic.
  • Proposed solutions must be subject to debate by accountable representatives and open to amendment.

Budget and scorekeeping process

Policymakers should provide for transparency and honesty in the budget process.

Budget gimmicks to make legislation appear as if it has been adequately offset should not be used.