The Center's work on 'Budgets' Issues


A Deserved Downgrade of Kansas’ Bonds

August 11, 2014 at 9:41 am

The meaning of Standard & Poor’s recent downgrade of Kansas’ credit rating, in which it cited Kansas’ “structurally unbalanced budget,” is clear:  Kansas’ budget is a train heading off a cliff.

Here are the details:

  • Kansas’ massive tax cuts have sharply cut state tax revenues.  Since Kansas’ massive tax cuts took effect a year and a half ago, revenues have nosedived.  Revenues were down about $700 million in the last fiscal year.  That’s much more of a drop-off than the state’s official forecasters expected.
  • There’s not enough revenue coming in this year to cover the state’s budget.  Hoping the tax cuts would produce more economic growth and wanting to avoid additional spending cuts, Kansas lawmakers approved a budget for this fiscal year that’s $326 million larger than the state forecasts it will collect in revenue.  In reality, the imbalance is even worse, because the budget is based on overly optimistic revenue projections.  The state assumes revenues will surge over the next year — even though more tax cuts will kick in in January.  That’s why Duane Goossen, the state’s former budget director, recently wrote, “[t]he Kansas budget appears to be teetering on the edge of a fiscal cliff, but that’s an illusion.  We’ve already gone over the edge.”
  • Kansas is avoiding immediate budget cuts only by drawing down its operating reserves.  The state isn’t in emergency mode already because it’s using its only operating reserves to cover the cost of state services.  (Kansas is one of only four states with no formal “rainy day fund,” so its operating reserves are not well protected and can be used in this imprudent way.)
  • The reserves likely will run dry sometime in the next few months, creating a budgetary emergency.  Once the reserves are gone, Kansas will be forced to make emergency cuts to state services, or to raise new revenue.  And any cuts would come on top of deep cuts the state has already made in recent years to its schools and other services.
  • The future looks even worse.  The new tax cuts taking effect at the beginning of 2015 will be followed by even more income tax rate cuts in each of the subsequent three years.  The additional cuts in 2016 alone will reduce revenues by about another $113 million.  So when the legislature comes back in session next January to write the state budget for 2016, lawmakers will have even less revenue to work with, making it even harder for Kansas to fund its schools and other services.

It’s no wonder that Standard & Poor’s downgraded Kansas’ credit rating, or that another major credit rating agency — Moody’s — did so earlier this year.  The rating agencies rightly understand that Kansas’ fiscal policy is a disaster.

Five Ways That States Can Produce a More Trusted and Reliable Revenue Estimate

August 7, 2014 at 12:10 pm

Update, August 7: We’ve updated this post to correct the number of states in which forecasting meetings are closed to the public.

Every state estimates how much revenue it will collect in the upcoming fiscal year. A reliable estimate is essential to building a fiscally responsible budget and sets a benchmark for how much funding the state can provide to schools and other public services. Yet, as our new report highlights, some states forecast revenues using faulty processes that leave out key players and lack transparency.

While there is no one right way to forecast revenues, research and experience suggest that states benefit from the following common-sense practices.

  • The governor and legislature should jointly produce a “consensus” revenue estimate. More than half the states (28) employ such a “consensus” process. In the other 22 states and the District of Columbia, either the governor and legislature produce competing forecasts (a recipe for gridlock and political infighting) or one branch of government is left out of the official process, which may reduce the revenue estimate’s value as a trusted starting point for writing the state budget.
  • The forecasting body should include outside experts. Including experts from academia or business, along with economic and budgeting experts from within the government, widens the economic knowledge available to the forecasting body and can improve how well a forecast is trusted. While more than two-thirds of the states draw on outside experts, 15 states do not.
  • The forecast and its assumptions should be published and easily accessible on the Internet. Most states follow this practice, but seven do not, leaving their estimates less transparent to anyone who is not directly involved in the forecasting process.
  • Meetings of the forecasting body should be open to the public. In 21 states and the District of Columbia, forecasting meetings are closed to the public, unnecessarily diminishing the trust that the forecasts might otherwise engender.
  • Estimates should be revised during the budget session. Reviewing earlier estimates to adjust them for changing economic circumstances can improve their accuracy. Fifteen states do not regularly review their estimates during the course of the budget session.

Together, these components create a strong, reliable revenue estimate. For example, a professional and open revenue estimating process makes revenue forecasts more transparent and accessible to the public and a broader group of legislators, which can lead to a healthier and more democratic debate and greater fiscal discipline.

States wishing to improve their revenue estimating practices have a number of models, since many states have adopted practices that produce a more trusted forecast (see map). Thirteen states employ all five of the best practices identified by our research and can serve as models for the rest of the country. One state — Arkansas — does not use any of the five best practices, and 11 others employ only one or two. These states, in particular, could benefit from adopting the better revenue estimating practices that many other states use.

Click here for the full report.

A Constitutional Convention Poses Grave Risks

July 16, 2014 at 4:33 pm

The idea of convening a constitutional convention to propose a balanced budget amendment or similar amendments raises grave problems, as we explain in a new paper.  A number of states have passed resolutions calling for such a convention, and proponents of a constitutional convention are targeting more states in an effort to obtain the 34 states needed to call one (see map).

A balanced budget amendment poses serious risks in and of itself.  But, as a number of legal experts across the political spectrum have warned, a convention could open up the Constitution to broader radical and harmful changes.  Such serious concerns are justified, for several reasons:

  • A convention could write its own rules.  No constitutional convention has been called since the 1787 meeting that wrote the Constitution, and the Constitution provides no guidance whatsoever on what a convention’s ground rules would be.  This leaves wide open to political considerations and pressures such fundamental questions as how delegates would be chosen, how many delegates each state would have, and whether a supermajority vote would be required to approve amendments.  To show the importance of these issues, consider that if every state had one vote in a convention and the convention could approve amendments with a simple majority vote, the 26 least populous states, with less than 18 percent of the nation’s people, could approve constitutional amendments for ratification. 
  • A convention could set its own agenda, possibly influenced by powerful interest groups.  The 1787 meeting went far beyond its mandate.  Charged with amending the Articles of Confederation to promote trade among the states, the convention instead wrote an entirely new governing document.  A convention held today could set its own agenda, too.  There is no guarantee that a convention could be limited to a given set of issues, such as balancing the budget.  
  • A convention could choose a new ratification process.  The 1787 convention ignored the ratification process under which it was established and created a new process, reducing the number of states needed to approve the new Constitution and removing Congress from the approval process.  The country then ignored the pre-existing ratification procedures and adopted the Constitution under the new ratification procedures that the convention proposed.  Given these facts, it would be unwise to assume that ratification of the convention’s proposals would require the subsequent approval of 38 states, as the Constitution specifies.  For example, a convention might remove the states from the approval process and propose a national referendum instead, or approval by a simple majority of states. 
  • No other body, including the courts, has clear authority over a convention.  The Constitution provides for no authority above a constitutional convention, so it isn’t clear that the courts, Congress, state legislatures, or a President could intervene if a convention went beyond the language of the state resolutions calling for a convention or the congressional resolution establishing it.  Likewise, there may be no recourse if the convention altered the process for ratifying its own proposed amendments.  The Constitution has virtually no restrictions on the operations of a constitutional convention or the scope of the amendments that it could produce, and the courts would likely regard legal challenges to a convention as “political questions” that the judiciary does not wade into. 

States should avoid these risks and reject resolutions calling for a constitutional convention, and those that have already approved such resolutions should rescind them.

Click here to read the full paper.

Balanced Budget Amendment Likely to Harm the Economy

July 16, 2014 at 4:21 pm

A number of states may soon call for a convention to amend the U.S. Constitution to require that the federal budget be balanced every year.  But a convention would pose serious risks, and a balanced budget requirement would be a highly ill-advised way to address the nation’s long-term fiscal problems.  It would threaten significant economic harm while raising a host of problems for the operation of Social Security and other vital federal functions, as we explain in a new paper.

By requiring a balanced budget every year, no matter the state of the economy, such an amendment would risk tipping weak economies into recession and making recessions longer and deeper, causing very large job losses.  Rather than allowing the “automatic stabilizers” of lower tax collections and higher unemployment and other benefits to cushion a weak economy, as they now do automatically, it would force policymakers to cut spending, raise taxes, or both when the economy turns down — the exact opposite of what sound economic policy would advise.  Such actions would launch a vicious spiral:  budget cuts or tax increases in a recession would cause the economy to contract further, triggering still higher deficits and thereby forcing policymakers to institute additional austerity measures, which in turn, would cause still-greater economic contraction.

For example, in 2011 one of the nation’s preeminent private economic forecasting firms concluded that if a constitutional balanced budget amendment had been ratified and were being enforced for fiscal year 2012, “[t]he effect on the economy would be catastrophic.”  If the 2012 budget were balanced through spending cuts, the firm found, those cuts would throw about 15 million more people out of work, double the unemployment rate from 9 percent to about 18 percent, and cause the economy to shrink by about 17 percent instead of growing by an expected 2 percent.

The fact that states must balance their budgets every year — no matter how the economy is performing — makes it even more imperative that the federal government not also face such a requirement and thus further impair a faltering economy.

Such a constitutional requirement — which would be notably more restrictive than the behavior of the most prudent states or families — would also cause a host of other problems.  Requiring that federal spending in any year be offset by revenues collected in that same year would undercut the design of Social Security, deposit insurance, and all other government guarantees.  And it would raise troubling questions about enforcement, including the risk that the courts or the President might be empowered to make major, unilateral budget decisions, undermining the checks and balances that have been a hallmark of our nation since its founding.  It is not a course that the nation should follow.

Click here to read the full paper.

More Time Unlikely to Fix Kansas’ Poor Strategy for Growth

July 9, 2014 at 1:35 pm

Heritage’s Stephen Moore argues that Kansas’ tax cuts, which have led to deep revenue declines that will make it harder for the state to invest in education and other drivers of long-term prosperity, just need more time to boost its economy.  But that’s not what proponents argued in 2012, when the legislature enacted the first round of deep income tax cuts.  Governor Sam Brownback said then that the tax cuts (designed by Arthur Laffer, a frequent collaborator with Moore) would be “like a shot of an adrenaline into the heart of the Kansas economy.”

We don’t know whether Kansas will under- or out-perform the U.S. economy in coming years (although the state’s own legislative researchers project slower growth for Kansas relative to the United States in 2015).  But recent experience and academic studies suggest that Kansas hasn’t improved its chances of economic growth by cutting taxes and may well have damaged them.

Our examination of how the big tax-cutting states of the past two decades have fared found that tax cuts aren’t a particularly fruitful strategy for growth:

  • Three of the six states that enacted large personal income tax cuts in the years before the Great Recession of 2007-2009 saw their economies grow more slowly than the nation’s in the following years.  The other three states enjoyed above-average growth, but they are all major oil-producing states that benefitted from a sharp rise in oil prices after the tax cuts.
  • Similarly, the five states with the biggest tax cuts in the 1990s created jobs during the next economic cycle at one-third the rate of other states, on average.  The biggest tax-cutting states also had slower income growth.

Among economic studies, there’s no consensus on the impact of state taxes on economic growth.  Some studies find that higher taxes hurt growth, some find that higher taxes help growth when they finance higher-quality education and better infrastructure, and most find that tax levels have only a minor impact either way.

Other states considering deep tax cuts in pursuit of economic growth should note those facts, as well as the damage that deep tax cuts have already done in Kansas.