Raising federal revenue the Libertarian way
Reality-check time. By returning the same political alignment to Washington in the last election, the American people in effect decided that solving the country’s budget problems will involve increasing revenue.
As Republicans in Congress negotiate with the White House to forge a long-term budget deal, we would like to suggest a bargain that will allow for more revenue while also ensuring that the new money actually - for once - goes toward deficit reduction.
In our perfect world, the budget would be balanced by drastically cutting excessive spending. That looks unlikely in this political atmosphere. But a major reason to oppose new federal revenue is the government’s well-established history of spending any money it can get its hands on now, and then borrowing or printing more when it runs out, leaving the bill to future generations.
That’s why any agreement that adds revenue should include some kind of restraint on spending.
Of course, such restraints haven’t had much success in the past. The line-item veto was declared unconstitutional in 1998. Sequestrations enacted by statute have proved malleable and thus ineffective. A balanced-budget amendment wouldn’t be politically achievable, and whether it would be good policy remains heavily contested in academic circles.
There is an alternative plan that could restrain spending and be palatable to both Democrats and Republicans: a “Pay As You Go” constitutional amendment.
A Pay As You Go (or PAYGO) mechanism is intended to prevent Congress from passing legislation that isn’t paid for. It requires that any revenue increases coming from tax reform or as part of a congressionally approved budget would have to go toward deficit and debt reduction - and couldn’t be spent on future legislative projects. A PAYGO amendment wouldn’t address the need to drastically reduce spending, but it would at least ensure deficit-reducing measures do what they’re intended to do while providing a restraint on future spending.
PAYGO was initially put in place by a divided government in 1990. It remained on the books until 2002, and is often associated with the elimination of deficits in the late 1990s. In 2010, PAYGO was reintroduced as part of a deal to increase the nation’s debt limit. Unfortunately, the new PAYGO rule is riddled with exceptions. For instance, it doesn’t apply to the U.S. Postal Service or Medicare provider reimbursements, and Congress can exempt any deficit-increasing bill from the restrictions by designating the legislation as a response to an emergency. Further, PAYGO is enforced by the Congressional Budget Office and the White House Office of Management and Budget, which in turn are responsible to the two branches of government that spend taxpayer money.
A PAYGO constitutional amendment, however, couldn’t be altered or abolished on a political whim, would never sunset, and couldn’t be evaded through statutory exemptions. Moreover, any violations of a PAYGO amendment would be addressable by the judicial branch, providing a check on the free-spending branches. A PAYGO amendment could thus serve as a powerful break on political tendencies to shift costs onto future generations.
The language of such an amendment would be the subject of negotiation, and this opens a can of worms. Given the ways Congress manipulates legislative wording, the amendment could be rendered ineffective. With this in mind, we propose the language be simple, straightforward and free of political exceptions.
The amendment should establish a special court with budget experts to handle cases of potential PAYGO violations. Leaving enforcement only with the CBO could expose its analysts to political pressure, because their estimates would have the potential to kill legislation. We imagine the special court might be petitioned to score legislation in advance of a bill’s passage to keep the system from getting clogged up. And we imagine that the amendment would enable nonprofit good- governance groups to serve as watchdogs, filing complaints to the court as necessary.
A strong PAYGO amendment would require that all new legislation be deficit neutral (or negative) over periods of two and 10 years, as scored by the CBO and approved by the special court’s budget office.
This compromise approach would allow for short-term stimulus measures (a nod to Keynesians) but they would have to be offset the next year (a nod to deficit hawks). Congress could renew stimulus spending annually if members thought the money was still needed, but they would be forced to analyze the effectiveness of the spending and defend its necessity each time. Automatic stabilizers already in legislation, such as unemployment insurance, wouldn’t have to be offset, so federal revenue and expenditures could remain countercyclical.
Finally, a strong amendment wouldn’t provide for any exempted spending, though there would surely be plenty of debate over whether wars should be left out of PAYGO. (Personally, we see value in a PAYGO amendment forcing Congress to carefully consider whether Americans are willing to pay for getting entangled in foreign conflicts.)
“Cut, Cap and Balance” - the agenda advanced by Republicans last year to limit federal spending - is no longer politically possible, and revenue increases have become inevitable. Until the conversation can be refocused on budget reductions, Republicans should insist on institutional reform to prevent future unfunded spending.
With the nation on a path to a sovereign-debt crisis, a constitutional PAYGO is a politically feasible way of achieving the structural change we need.
Anthony Randazzo is the director of economic research at the Reason Foundation. Marc Joffe is the principal consultant of Public Sector Credit Solutions and formerly a senior director at Moody’s Analytics.