October 4, 2004

October 4, 2004 | WebMemo on Federal Budget

The Balanced Budget Amendment: The Wrong Answer to Runaway Spending

Lawmakers had planned to bring the Balanced Budget Amendment (H.J. Res. 22) to the House floor this week, in what would have been its first sighting in Congress since 1995. But instead the House delayed this debate in order to have more time before the coming recess to pass the kind of wasteful spending bills that the amendment is supposed to curtail. Apparently, debating fiscal responsibility is a luxury Congress cannot presently afford. But the delay is just as well. While the amendment's author, Rep. Ernest Istook (R-OK), deserves credit for trying to remedy the fiscal irresponsibility of the past few years, the amendment would likely fail to rein in federal spending and could even bring about tax increases. Furthermore, the Balanced Budget Amendment wrongly focuses on the deficit, which is merely a symptom of the larger disease of runaway spending.

The current Balanced Budget Amendment proposal contains three weaknesses:

  1. No supermajority requirement for tax increases. The only policies lawmakers avoid more than tax increases are spending reductions. Accordingly, lawmakers have historically responded to budget deficits with tax increases rather than spending controls.

    Past Balanced Budget Amendment proposals have addressed this bias by requiring a supermajority vote to raise taxes. Yet the current proposal excludes this taxpayer protection. If the Balanced Budget Amendment were to take effect on December 31, 2008, lawmakers would likely respond to the budget deficit the same way they did during the last two major deficit-reduction deals, in 1982 and 1990-by relying almost exclusively on tax increases. It should be noted, though, that these tax increases did not lead to balanced budgets, just as critics warned.

    Should lawmakers raise taxes to close the budget deficit, the resulting losses in economic growth, jobs, and incomes would overwhelm the theoretical economic benefits of deficit reduction.

  2. The amendment can be waived at any time with a three-fifths vote. Given the unpalatable choices a Balanced Budget Amendment would require-massive tax increases or unprecedented spending restraint-lawmakers could easily secure the three-fifths vote necessary to waive the amendment. The Senate already requires a three-fifths majority to pass most legislation, and that barely slows down most spending bills.

  3. The amendment can be waived during minor military conflicts. Section 5 of the resolution states that the House and Senate would need only a majority vote for a resolution to waive the amendment any time the United States is "engaged in military conflict which causes an imminent and serious military threat to national security." While most would interpret this section to apply to wars such as those in Afghanistan and Iraq, there is nothing to stop Congress from invoking this exception any time any American soldier is engaged in any conflict.

    There is a precedent for such shenanigans: Congress currently skirts its budget restraints by declaring as an "unexpected emergency" everything from routine annual spending bills to the 2000 Census (which was scheduled centuries ago). Similarly, lawmakers could abuse this loophole by using the long-term war on terrorism or even a minor military conflict to waive the Balanced Budget Amendment.

Lawmakers Should Focus on Spending, Not Deficits

Budget deficits are merely a symptom of the larger problem of runaway spending. All federal spending increases must be financed by taking resources from the productive sector of the economy by either collecting more taxes or borrowing more (that is, increasing the deficit). A Balanced Budget Amendment would not eliminate this unattractive trade-off. Instead, it merely would require that spending increases be financed by higher taxes rather than higher deficits-at best jumping from one frying pan to the other.

The only desirable option would be to reduce the excessive federal spending that created the painful trade-off in the first place. If lawmakers roll back the 25 percent increase in spending since 2001 that created this problem, they could provide both tax relief and deficit reduction.[1]

To focus on the larger problem of spending, lawmakers should instead enact a Taxpayers' Bill of Rights (TABOR) law limiting federal spending increases to the inflation rate plus population growth. Washington now spends more than $20,000 per household because the federal budget process provides no enforceable cap on spending. Lawmakers can simply add up every spending request and spend that amount. TABOR would force Congress and the President to do what families and state and local governments are already required to do: set priorities and make trade-offs.

Colorado implemented the nation's first TABOR law in 1992. Since then, taxes in Colorado have plummeted, while job and economic growth rates have doubled. A federal TABOR would save taxpayers $4 trillion over the next decade, enough to substantially reduce taxes and reduce the budget deficit.[2]

Lawmakers must also reform Social Security and Medicare. No budget reform-whether a Balanced Budget Amendment or Taxpayers' Bill of Rights-could survive the $10,000 per household tax increase (in today's dollars and incomes) that will eventually be required if these entitlements are not reformed. Moreover, a myopic fixation on budget deficits could inhibit needed entitlement reform, since policymakers would have a hard time financing transition costs for personal retirement accounts-even though this reform would dramatically reduce the government's long-run Social Security deficit!

Conclusion

Discussion of the Balanced Budget Amendment is a positive sign that lawmakers may finally be ready to address the fiscal irresponsibility of the past few years. But the House's unwillingness to carve time for floor debate out of its spending-bill schedule underscores that too few members take the issue seriously.

Still, because the Balanced Budget Amendment wrongly focuses on the budget deficit, rather than the larger problem of runaway federal spending, its delay is no tragedy. Lawmakers should instead implement spending controls that both reduce the budget deficit andavoid painful tax increases.

Brian Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

Brian M. Riedl Grover Hermann Fellow in Federal Budgetary Affairs
Thomas A. Roe Institute for Economic Policy Studies

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[1] For examples of wasteful spending that could be eliminated, see Brian M. Riedl, "How to Get Federal Spending Under Control," Heritage Foundation Backgrounder No. 1733, March 10, 2004, at www.heritage.org/Research/Budget/bg1733.cfm.

[2] For more on TABOR, see "Restrain Runaway Spending with a Federal Taxpayers' Bill of Rights," Heritage Foundation Backgrounder No. 1793, August 27, 2004, at www.heritage.org/Research/Budget/bg1793.cfm.