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 can erode democratic processes and institutions and eliminate the flexibility that governments need to address changing economic and political circumstances.
Line-item veto and enhanced rescission power—presidents and governors have requested the power to delete individual provisions of bills sent to them for signature and thereby avoid vetoing the entire piece of legislation.
Supporters of the line-item veto claim that it would reduce the number of special-interest provisions and help control spending. Opponents counter that the savings from such vetoes would be small, the veto would give too much power to the executive branch, and arbitrary cuts to important programs could result.
Balanced budget amendment—the projections of large and continuing federal budget deficits has generated some support for a constitutional amendment to require federal budget balance. 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 to conduct economic policy that counteracts the effects of economic slowdowns and responds to national emergencies. In addition, such an amendment poses questions of constitutionality. In fact some previous attempts at creating balance budget amendments have been found to be unconstitutional.
Pay-as-you-go—the federal pay-as-you-go (PAYGO) rule requires that all new legislation be paid for within a certain timeframe through either tax increases or spending reductions. So-called “one-sided” PAYGO rules require that any new costs be offset by spending reductions only, removing increased revenue as an option.
Supermajority requirements—some states require a supermajority of legislators rather than a simple majority to raise taxes but not to cut 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 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, which can be problematic. First, caps can result in the use of budget gimmicks to mask true costs.
Budget 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.
Second, such limits can lead to reduced funding for programs critical to vulnerable groups, especially 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 (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’ needs to deal with natural disasters, acts of terrorism, or sudden increases in costs imposed by the federal government.
Independent commissions—Policymakers and others have at times 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. However, such commissions must be structured in ways to ensure a fair and legitimate process.
BUDGET PROCESS AND REFORMS: Policy
Tax and spending decisions should be the purview of the legislative branch and should not be subject to legislative line-item veto and enhanced rescission-power proposals by the executive branch.
Balanced budget amendment
A balanced budget amendment to the US Constitution 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.
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.
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.
Guidelines for tax and expenditure limits include the following:
- 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.
If Congress imposes discretionary spending caps, they should be set at a realistic level to avoid placing unnecessary burdens on programs serving people with low incomes.
If states and localities have tax and expenditure limits, whether statutory or constitutional, they should contain provisions that require: periodic review, defensible metrics, adequate provisions for future growth, fiscal balance, and equitable plans for distributing surplus funds.
Efforts to balance the budget or address shortfalls should remain the purview of the legislative branch and be fully negotiated by elected officials. If the responsibility for identifying possible solutions is delegated to an outside body, the group should take a holistic approach to the topic, and the composition and work of the group should have integrity and accord with principles of good governance.
The following principles should apply to commissions established to address budget balance:
- 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
- the solutions proposed 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 and refrain from using budget gimmicks to make legislation appear as if it has been adequately offset.