Thursday, February 15, 2018

Do We Need a TABOR in Wyoming? Part 2

In my blog article on February 6 I explained the fallacy of relying on the regular business cycle for budget balancing. My points were:

a) In a regular business cycle, a current-revenue surplus (1) should be set aside to pay for a current-revenue deficit later on (2),

Figure 1

b) This fiscal-balancing method breaks down when the economy causes a structural deficit in the budget (3),

Figure 2


c) We need a slimmer, smaller government on a lower long-term spending trajectory (4) so that we can permanently reduce the tax burden on the Wyoming economy (5):

Figure 3

I have written at length about the spending reforms we need in order to get from trajectory (a) to trajectory (5). I will not repeat those reforms again, though please take a look at my essay A New Chapter for Wyoming for a detailed account. What matters here, instead, is what measures we would need to put in place on the state budget to permanently reduce the size of government.

We already have constitutional limitations on government debt, though at least one notable critic suggests that Article 16, Sections 1 and 2 are not strong enough to qualify as a balanced-budget requirement. The question of whether further restrictions are needed at the constitutional or statutory level is not for me to discuss here; the important part is what measures we need to put in place. 

Article 16, Section 1 reads as follows:
The State of Wyoming shall not, in any manner, create any indebtedness exceeding one per centum on the assessed value of the taxable property in the state, as shown by the last general assessment for taxation, preceding; except to suppress insurrection or to provide for the public defense.
In other words, we can increase state debt with rising property values. In theory, a continuous rise in assessment values will therefore allow for a permanent use of deficits to pay for government operations. In practice, this is not going to happen, unless there is a deliberate, and unrealistic coordination between the tracking of property values and government borrowing. 

In practice, therefore, Section 1 is a firm cap on government borrowing. 

Section 2 is a bit more permissive:
No debt in excess of the taxes for the current year, shall in any manner be created in the State of Wyoming, unless the proposition to create such debt shall have been submitted to a vote of the people and by them approved; except to suppress insurrection or to provide for the public defense.
Plain and simple: you cannot borrow more than what you take in during one year. This is actually not a balanced-budget requirement, only a deficit limitation: if the state would like to, it can borrow $1 for every $1 in tax revenue during one fiscal year, provided that the total debt at the end of that fiscal year does not exceed one percent of the total assessment value of government property. 

Since the deficit can be up to 100 percent of current tax revenue, this means that government spending can be up to 200 percent of current tax revenue. Again, there is a difference between theory and practice: you cannot know your current-year tax revenue at any greater detail until the very end of the year, thus preventing a max-out of constitutionally permitted borrowing. 

That said, since we do not have a stringent budget-balancing requirement in the constitution, and since we are currently in a multi-year period of deficits being plugged with money from investments and the budget-stabilizing LSRA, it is clear that we need stricter limitations on the budget. However, these limitations should not focus on the debt and the deficit - but on government spending. As explained above in Figures 1-3, that is the source of our state's fiscal problems. 

Representative Gray's TABOR initiative, which we discussed yesterday, suggests a cap on taxation that is somewhat similar to the cap on borrowing, as quoted from Section 2 above. In the right context, this is a good idea; another approach, not mutually exclusive, is to tie in the funding of government outlays to a tax cap and then prevent the legislature from raising taxes when they get to the scenario in Figure 2 above. 

What would that look like?

1. A universal voter cap on tax hikes, again a somewhat modified version of Rep. Gray's HJ0007 TABOR bill. It would be reasonable that if we are going to require a 2/3 majority among legislators to raise taxes, we should also require a 2/3 voter majority for the same purpose. 

2. A current-revenue funding mandate. This means, plain and simple, that the surplus illustrated in Figure 1 (blue) is the only money that can be used to fund the deficit (red). We would need statutory or constitutional language mandating that the surplus be deposited into a budget stabilization account, such as LSRA. Then, as the recession strikes, the only money that the legislature could tap into would be what has been deposited into LSRA. 

3. Priority of funding. So long as there is money in LSRA, the legislature cannot vote to raise taxes, nor call for voter approval of such tax hikes. The point with this feature is to force the legislature into a corner where they really do not want to be, namely where they have to adjust spending downward and avoid excesses in good times, in order to have enough money in the LSRA. 

4. Structural spending cuts. If, once the budget stabilization money has been spent, two thirds of the voters do not approve of a tax hike, the state legislature is stuck with only one option: structural, permanent reductions in state spending. This would mean elimination of programs, employee positions and agencies that will not be replaced or reappear in a reformed format. 

If we can get a statute or a constitutional amendment to put these restraints on the state budget, we will be in a great position to permanently reduce the size of our state government. It does not matter if we call it TABOR or something else; what matters is that we raise the bar for more spending and frivolous tax hikes so high that it is humanly impossible for the legislature to continue on their current, long-term fiscally destructive path. 

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