Budget Process and Reforms

Background

Over the years, federal and state governments have tried to change budget rules to control government spending and impose fiscal discipline. Some of these proposals have the potential to erode democratic processes and institutions, and to eliminate the flexibility that governments need to address changing economic and political circumstances.

Discretionary spending caps and PAYGO—the PAYGO (pay-as-you-go) rule requires that all new legislation be paid for within a certain timeframe through either tax increases or reductions in spending. First adopted in 1990, it expired in the early 2000s. The House and the Senate reinstated PAYGO in 2007, but only as a procedural rule, not as a statute.

Discretionary spending caps are another way to limit spending. Many agree that spending caps can help curb discretionary spending growth, provided policymakers remain committed to budget discipline. Without such discipline, it is often possible to circumvent the caps.

Currently most discretionary appropriations are constrained through 2023 by the caps put in place by the Budget Control Act of 2011. The act led to a sequester in fiscal years beginning in 2013.

While these rules can help maintain budget discipline, they often lead to reduced funding for programs critical to vulnerable groups, especially people with low incomes. This is particularly true in cases of “blunt” across-the-board caps or cuts, such as those enacted in 2011.

Line-item veto and enhanced rescission power—in 1996 Congress created the line-item veto, which allowed the president to cancel appropriations, new spending, and some tax benefits. The president had to notify Congress of his actions, and the items that were vetoed were permanently canceled unless Congress voted to disapprove the measure within a limited time. Because disapproval legislation could be vetoed, stopping a presidential cancellation in reality required a two-thirds majority vote. In 1998 the Supreme Court ruled the line-item veto unconstitutional.

Supporters of the line-item veto claim that it would reduce the number of special-interest provisions and help control spending. Other budget experts note that the savings from such vetoes would be small and the tool rarely used. Opponents are also concerned that the veto would give too much power to the executive branch and that spending and tax breaks would not be equally protected.

Recent attempts to reintroduce a modified line-item veto were unsuccessful.

Balanced budget amendment—the current outlook for large and continuing budget deficits has generated some support for a constitutional amendment to balance the federal budget.

Such an amendment would be ill-advised for a number of constitutional and economic reasons. To be enforceable, a constitutional amendment would necessarily shift the power to tax and spend from elected officials to an unelected judiciary. This would weaken the accountability of Congress and the president for fiscal decisions. And it could lead to a constitutional conflict between the courts on one side and Congress and the president on the other.

While supporters claim that a balanced-budget amendment would mirror the balanced-budget requirements found on the books in almost all states (except for Vermont), the analogy is superficial. The structure of state requirements differs from the structure in the proposals that Congress has considered. Roles of state and federal governments in managing the economy differ as well. States are not responsible for setting macroeconomic policy. In addition, “balance” as ostensibly required in most states does not automatically mean that current revenues equal current spending. In fact, states often run budget deficits—sometimes large.

A strict constitutional requirement for a balanced budget would limit the federal government’s ability to respond to changes in the economy and to national emergencies, such as the 2008 Great Recession. Compared with the states, the federal government needs more flexibility to conduct countercyclical economic policy. At the state level, the balanced-budget requirement often limits states’ ability to counteract the effects of economic slowdown and sometimes exacerbates such slowdowns.

Supermajority requirements—some states require more than a simple majority of legislators to raise taxes but not to cut taxes or spending (i.e., a “supermajority”). Some states require that at least two-thirds of legislators approve bills to increase taxes, but they require only a simple majority to pass a cut in taxes or spending. This is problematic because it tilts budget-balancing activities toward spending cuts, which disproportionately hurt lower-income and vulnerable populations, while protecting tax expenditures that disproportionately benefit higher-income people. In addition, these requirements make it harder to finance programs for which only a majority vote is required.

Ballot initiatives and the Taxpayer Bill of Rights—in recent years taxing and spending questions increasingly have been put on state ballots. Thus voters must decide on highly complex fiscal issues that are often simplistically formulated. This is part of a general trend, especially pronounced in Western states but spreading, toward governing via initiatives and referenda rather than legislation.

Beginning in 2005, Taxpayer Bill of Rights (TABOR) initiatives emerged in about half the states. TABORs place rigid constitutional limits on state (and sometimes local) government revenues and expenditures based on a formula of inflation plus population growth. This formula does not allow for the fact that the fastest-growing demographic groups, such as older adults and people with disabilities, are costly to serve. Nor does it take into account states’ need to deal with natural disasters, acts of terrorism, or sudden increases in costs imposed by the federal government.

TABOR initiatives are often backed by out-of-state groups portraying the effort as part of a citizens’ grassroots movement. Supporters seek to shrink government and privatize most of its primary functions. Although proponents have failed to get a TABOR on the ballot in all but a handful of states—where it has mostly failed—it will be a state issue for the indefinite future. (Only Colorado voters have ever passed a TABOR, and it caused such serious economic disruption that they suspended it for a five-year period in November 2005.)

Such initiatives pose a threat to representative democracy. State budgets should be negotiated documents that reflect the values of the state in light of projected revenues and expenditures. Such negotiation must be done by legislators annually. In fact, that is the essence of their duty. Negotiation is undermined if it is constrained by constitutional mandates that specify maximum or minimum revenue or expenditure amounts.

Commissions—policymakers and others have at times proposed to create entities outside the regular budget process to make recommendations for how to close budget gaps. Such entities may be useful in educating Congress and the public and in defining options. However, they must be structured properly to ensure a fair and legitimate process.

Budget gimmicks—growing pressure on the federal budget, PAYGO rules, the limits of representing cost estimates in a five- or ten-year budget window, and policymakers’ reluctance to make difficult budget choices can all provide perverse incentives to use budget gimmicks to make a bill’s costs appear to have been adequately offset. These gimmicks can include phasing in a provision without an economic justification, designating as temporary a policy clearly intended to be permanent, and using offsets that clearly do not cover the cost of provisions beyond the budget window.

Budget Process and Reforms: Policy

Line-item veto

In this policy: FederalBudgetbudget process

The legislative branch should retain control over tax and spending decisions.

AARP opposes the legislative line-item veto and enhanced rescission-power proposals because they would give the president the authority to make arbitrary cuts to important programs and tilt the balance of power in favor of the executive branch.

Balanced budget amendment

In this policy: FederalBudgetbudget process

AARP opposes a balanced-budget amendment to the US Constitution because 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. States should reject any balanced-budget amendment that Congress refers to them for ratification

Spending caps

In this policy: FederalBudgetbudget process

If Congress imposes discretionary spending caps, they should be set at a realistic level to avoid placing unnecessary burdens on programs serving low-income people. The administrative funding of Social Security should not be included under such caps.

Pay-as-you-go (PAYGO) rules

In this policy: FederalBudgetbudget process

AARP supports effective and balanced rules for fiscal discipline. For example, at the federal level, if PAYGO rules are applied, both mandatory spending and revenues should be subject to PAYGO rules.

Supermajorities

In this policy: StateBudgetbudget process

AARP opposes supermajority voting requirements for budgetary or tax matters.

Tax and expenditure limits

AARP generally opposes tax and expenditure limits. Taxpayer Bill of Rights initiatives are the worst example of proposals that would virtually eliminate needed fiscal flexibility.

If states and localities have tax and expenditure limits, whether statutory or constitutional, they should contain:

  • 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 funds to adequate percentages of general fund expenditures; and
  • a procedure for refunding surplus revenue, as nearly as possible, to those who paid it.

The government should not limit its ability to address future economic and political changes and the need for investments. There should be a bias against any effort to limit the government’s flexibility in taxing and spending. Any such decisions should have a compelling justification.

Except for general-obligation bond issues, states should not refer tax and spending matters to the electorate for decision.

Commissions

In this policy: FederalStateBudgetbudget processcommission

Efforts to balance the budget or address shortfalls should remain the purview of the legislature and be fully negotiated by elected officials. If the responsibility for identifying possible solutions is delegated to an outside body, the following principles should apply:

  • the outside body should consider revenues, tax expenditures, and spending;
  • the conduct of the entity should be fair and transparent;
  • the outcome 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; and
  • the solutions proposed must be subject to debate by accountable representatives and open to amendment.

Budget and scorekeeping process

In this policy: FederalBudgetbudget process

Congress should provide for transparency and honesty in the budget process and refrain from using budget gimmicks to make legislation appear as if it has been adequately offset.

State budget cyclicality

In this policy: StateBudgetbudget processrainy day fund

The process of restoring the balance of rainy-day funds should be made more automatic, perhaps by earmarking a specified fraction of current revenue for them. Payments into rainy-day funds should not be required until revenues have recovered. A general strengthening of states’ budgetary practices would also reduce the risk of depleting these funds. These policies would dampen the pro-cyclicality of state budgets.