The Center's work on 'Budgets' Issues

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.

Year-End Revenue Numbers More Proof of Kansas’ Failed Tax Cut Experiment

July 1, 2014 at 2:11 pm

Kansas officials yesterday announced that state revenue dropped more than expected again in June, adding even more to the damage we previously documented from the tax cuts that Kansas put in place last year.  All told, Kansas brought in $338 million less than it expected in fiscal year 2014, which ended yesterday for the state.

Kansas policymakers should have seen this coming when they enacted the tax cuts.  For one thing, as we wrote at the time, the package included an especially wasteful provision: eliminating taxes on profits passed through from businesses to their owners, an idea that has been widely panned, most recently by the New York Times’ Josh Barro.

The latest news also draws further attention to the damage that economist Arthur Laffer and his employer, the American Legislative Exchange Council (ALEC), are doing to states. Laffer was the architect of Kansas’ plan, and ALEC continues to push for similarly damaging tax cuts in other states ― as Paul Krugman and my colleague Jared Bernstein recently pointed out.

Kansas’ disappointing 2014 revenue results provide another piece of evidence that should give pause to other states considering similar ALEC-backed tax cut plans.

Do’s and Don’ts for Stronger State Economies

June 24, 2014 at 1:24 pm

A number of proactive fiscal policies can prime states for a more prosperous future, our updated guide explains.  They include:

  • Target economy-boosting investments.  Research shows that investing in services like education, transportation, and health care promotes economic growth and job quality in the long run.  Maintaining and improving these services requires resources.  States should scrutinize existing spending to find savings, raise revenue when necessary, and bring their revenue systems in line with a 21st century economy, such as by broadening the sales tax base to include more services.
  • Improve fiscal planning.  Strong fiscal planning helps states determine the resources needed to sustain, beyond any one budget year, investments critical to economic growth. That’s why policymakers should budget for the future:  lay out a clear roadmap, ensure that budget impact analyses are credible, and create mechanisms to trigger needed mid-year course corrections.
  • Help struggling families.  Years after the official end of the Great Recession, millions of Americans continue to struggle.  Helping people meet basic needs and move up the economic ladder is critical to a state’s long-term success.  States can do this by protecting and expanding Earned Income Tax Credits, which help low- and moderate-income working families keep more of what they earn to pay for things that help them stay on the job, like child care and reliable transportation. States also should properly fund their unemployment insurance systems and protect supports for the neediest families through Temporary Assistance for Needy Families (TANF).

On the flip side, our guide also recommends that states:

  • Avoid ineffective strategies and gimmicks.  Several states have enacted or considered deep income tax cuts in the name of promoting economic growth.  But these tax cuts typically provide the largest benefits to high-income people, while doing little to nothing for everyone else.  Bad choices in good economic times, these tax cuts are even more unwise when revenues have just barely surpassed pre-recession levels.  The result is less money for services that are fundamental to economic growth, as well as increasingly skewed tax systems in which the lowest-income people pay the biggest shares of their incomes in taxes.