Previously: The GOP approach to government finance vs. reality. (January 16, 2012)

We had a lively exchange about HJR with Representative Chris Kelly (D) two weeks ago. As WillyK, the author of the original post, wrote in a comment:

So, Representative Chris Kelly (D) sent us the following on HJR 43:

PUT SOME AWAY FOR A RAINY DAY

“Let Pharaoh take action to appoint overseers in charge of the land, and let him exact a fifth of the produce of the land of Egypt in the seven years of abundance. Then let them gather all the food of these good years that are coming, and store up the grain for food in the cities under Pharaoh’s authority, and let them guard it. Let the food become as a reserve for the land for the seven years of famine which will occur in the land of Egypt, so that the land will not perish during the famine.”  Genesis 41, 34-36

Representative Eric Burlison (R-Greene) has introduced House Joint Resolution 43 to limit the amount of General Revenue Missouri State government may spend in any given year and to provide for reserve funds to be used in times of emergency and economic downturns.  HJR43 is similar to previous resolutions sponsored by former House Budget Chairman Allen Icet. As a Democrat, I support this bill. This is my reasoning…

…If adopted by a vote of the people, HJR43 would work as follows:  In any given year the percentage of state spending could increase by the sum of: 1) the percent of population growth, 2) the percent increase of the Consumer Price Index, and 3) 1.5% of the previous year’s budget.  If additional revenue remained available, the next one percent would be assigned to retire outstanding State debt.  Additional available dollars would automatically flow into the cash operating reserve fund to be used for emergencies and in times of economic downturn.  If additional revenue remained and the cash operating reserve fund was filled, it would trigger a one-time reduction in individual income tax rates.

I offered an amendment to Rep. Burlison’s bill, which would use FY2008 as the base year to trigger this law, rather than FY2010, as originally proposed. That is, the entire plan would take effect only when state general revenue reached the FY2008 level, at almost exactly eight billion dollars.  The FY2010 budget was a low point in recent state history, and would have triggered this action at a much lower level. My amendment was subsequently passed by the Budget Committee and the Rules Committee, and will be included in the bill as voted upon by the full House of Representatives.

The Cash Operating Reserve Fund would require about $325 million to be filled. These funds could be used in case of emergency, such as the 1993 flood or the 2011 Joplin tornado, upon request of the Governor and an affirmative vote of two-thirds of both Houses or, in years of negative economic growth, upon agreement of the Governor and a simple majority of both Houses.

To illustrate let us assume that HJR43 were in effect now.  This year our General Revenue is about $7.33 billion.  Nothing could happen–this law would not come into play–until revenue grew back to $8 billion. That alone allows for growth of $670 million, a growth rate of about 8%.   Let us then assume that the year after revenue reaches $8 billion–let’s call it Year 2–Missouri experiences revenue growth of ten percent ($800 million)–a growth rate that has happened only twice in the past twenty years.  

Let us further assume zero population growth and a CPI (Consumer Price Index) growth rate of 3% in Year 2.

Zero population growth plus $240 million (3% of $8 billion) plus $120 million (the additional 1.5% allowed in the HJR) equals $360 million of new spending (on top of the $670 million spent in the previous year).  

$80 million (1%) would then be used to pay debt service, leaving an additional $360 million to flow into the cash operating reserve fund.  At this point there would be no money remaining for any tax rebate but, in any future year, revenue in excess of $360 million, adjusted for inflation, would be returned to taxpayers as a temporary reduction in all state individual income tax rates.

The net result is that the State would have used $360 million for education, public safety, corrections, health, mental health, while all of the other essential state services would have healthy balances in the reserve funds, have less public debt and be prepared to provide temporary reduction in all state individual income tax rates in future years. (I have purposely used low numbers for population growth and CPI.  Any increases in those numbers would result in more money being available for appropriation.)

When State Revenue reaches the FY2008 Base Year Revenue of $8B,

State spending would be allowed to increase by:

% Population Growth + % Increase in CPI + 1-1/2% of the Previous Year’s Budget

Example: = 0 + (3% x $8B) + (1.5% x $8B) = allowable spending

= 0 + $240M + $120M =  $360M

In this example, if total revenue were $8.8B in Year 2

($8B base + $800M additional revenue):

•  $360M could be used to increase spending

•  1% ($80M) would go to Debt Service  (1% of the 2008 Base Year Budget of $8B)

•  The remaining $360M would be placed in the Cash Operating Reserve Fund.

•  With the $800M exhausted ($360M + $80M + $360M), no revenue would flow to the

   taxpayer protection and stabilization fund in Year 2

Opposition to HJR43 takes two major forms:

First, opponents argue that no limit on state spending is necessary–the legislature, comprised as it is of rational and thoughtful people, will use its’ best judgment and spend the increases wisely.  One of the disadvantages of being the longest serving member in the Legislature is that I can remember things.  In 1996, state revenue grew by more than 10%. Democrats, who controlled both Chambers and the Governor, were terrified that the Hancock Amendment might actually work to trigger refunds so they repealed the sales tax on prescription drugs and food.  In 2007 state revenue growth again topped 10%. The Republicans, who controlled the Governorship and both Chambers, emulated the Democratic folly and decreased the income tax.  Together these two permanent tax decreases cost the State more than $525 million.  Of course, in the years immediately following, the revenues returned to more normal levels and the state was left with the disaster created by enacting permanent solutions to the temporary problem of unusually high one-time revenue.  In neither case was either party willing to save money for a rainy day.  It would have been far better for the Democrats in 1996 to allow Hancock to work and far better if the Republicans would have practiced the prudence that Republicans preach and saved the money in 2007.  Alternatively, they both could have enacted a one-time taxpayer rebate.

We can be certain that Missouri will face crises in the f
uture.  The 1993 flood should have provided ample forewarning for the Joplin tornado and the economy will inevitably wax and wane.  The empirical evidence is that without some kind of reasonable braking mechanism the Legislature will not save sufficiently to meet the natural and economic crises that are certain to come.  It is also important to realize that by most every assessment we will never again see a circumstance under which the Hancock Amendment’s limitations to state spending would be imposed.  HJR43 is, in essence, a replacement of the Hancock Amendment, not an addition to it.

The other objection to HJR43 is that it is a TABOR bill.  TABOR, the so-called Tax Payer Bill of Rights, is the measure enacted by the voters of Colorado in 1992 that caused serious economic dislocation in that state and which has since been substantially modified.  TABOR and HJR43 are similar only to the extent that the limitation on spending growth is based on population and CPI.  TABOR contained none of the mitigating protections in HJR43 (the additional 1.5% growth, the 1% for debt service, or the emergency and stabilization funds).  HJR43 also contains a sunset clause (of 5 years), which TABOR did not. TABOR contained substantial restrictions on local governments, again which HJR does not.  The only reasonable way a person might compare HJR43 to TABOR is to argue that any constitutional limit on governmental spending is inappropriate.  Some opponents refer to HJR43 as “TABOR lite”.  I prefer to think of it as “TABOR rational”.  The evidence is strong that HJR43 will actually result in more stable, predictable, and gradual growth rather than the wide swings that we have experienced, especially because each time we have had a temporary upward swing in revenue, it was used as an argument to permanently decrease revenue.

An important difference exists between how much revenue the Government raises and how it manages that revenue.  I am now and have consistently been an unapologetic, pro-tax Democrat. Missouri clearly has insufficient revenue to cover the basic services required of state government. This year I have sponsored the Internet Sales Tax Bill.  Last year I sponsored an increase in the tobacco tax.  I was a proud supporter of Governor Mel Carnahan’s tax increase for education and, at the request of Governor John Ashcroft, was the successful sponsor of the largest tax increase in the history of the State of Missouri, the Federal Reimbursement Allowance.  

HJR43 is not a limit on taxes.  Under its provisions the people of Missouri are free to enact any taxes they choose and those taxes would be exempt from the provisions of HJR43.  HJR43 is a mechanism for the rational management of state dollars and a control over unrestrained growth. HJR43, if passed into law, would be enacted as a constitutional amendment only by a final vote of the people.  In an issue of this magnitude, that’s where the final say belongs.

Joseph, who I regard as the patron saint of governmental budget geeks, had it right.  Put some away for a rainy day.

Progressives pride themselves on being members of the reality-based community. This preference for reality directly pits them against today’s GOP, the members of which are almost uniformly enthralled by ideological fantasies that involve assumptions unsupported by facts (e.g. low taxes on the wealthy support growth) and that result in simplistic, often destructive policies (e.g., cutting government spending during a recession). Nowhere is this attitude more evident than in the battle over how to finance government.

In Missouri this dynamic has played itself out in what threatens to become a yearly ritual: the effort to impose TABOR-style spending caps. This year is no exception; GOP legislators are  proposing a a resolution(HJR 43) that would place on the November ballot a constitutional amendment to enact a TABOR variant, a tax and expenditure limit or TEL:

The proposal, which would amend the Missouri Constitution, would limit the growth in annual state spending to the inflation rate plus the percentage change in population for Missouri. Any extra revenue would help pay off state debt, cover emergencies or go back to taxpayers as temporary tax cuts.

Similar efforts to handcuff future legislators have failed in the past, but there are two factors that could make a difference this year. First, Missouri’s plantation master, Rex Sinquefield, supports the concept and has supplied his main man in the House, Speaker Steve Tilley (R-106), with a sizeable payout. Second, the inevitable Democratic quisling has been secured, in this case, Rep. Chris Kelley Kelly (D-24), who thinks it will be fine to handicap future legislators as long as the cap is high enough – based on 2008 revenue – and does not take effect right away, but is delayed until state revenues reach that highpoint.

It doesn’t take a genius to figure out that it’s never a good idea to decrease legislative flexibility, particularly when dealing with future conditions that cannot be accounted for in the current environment. As the Center on Budget and Policy Priorities notes, here are numerous factors that belie the seeming simplicity of this approach to enforced government spending restraint.

— No existing measure of inflation correctly captures the growth in the cost of the kinds of services purchased in the public sector, so the inflation adjustment generally is not sufficient to allow the continuation of existing services. State governments spend much of their money on education and health care, which typically have cost increases greater than the general rate of inflation. […]

— The subpopulations that state governments serve tend to grow more rapidly than the overall population growth used in the formula. […]

— The rigidities of formula-based budgeting, such as a population-plus-inflation growth factor, do not allow funding of new priorities that may be embraced by the public, such as reduced class sizes or more stringent corrections policies. They do not allow states to adapt to federal mandates that require states to spend more in areas such as security and education, and they may have no provisions for emergency spending on natural disasters or other unanticipated problems.

— A TEL based on a population-plus-inflation growth factor, or any other artificial formula, moves the budget process away from the careful weighing of competing priorities and consideration of the value of new initiatives and toward a process defined by sterile limits that require the shrinking of government services in most years.

Most damming, of course, is the Colorado experience with its TABOR law which had a disastrous effect on the state. Speaker Tilley seems to think that this new effort to limit future finance options is  “very, very different” from the Colorado law, but it is difficult to figure how it really differs in substance, or how it answers any of the objections outlined above.

Of course, the Missouri TEL wouldn’t take effect until state revenues have recovered significantly, but even in the highwater year of 2008, revenues were arguably not sufficient for the state’s needs. Rep. Ginese Monticello (D-66) expressed concerns about education and social services in Missouri under the proposed formula:

Even if I could get all the money in the world for education I have some concerns for social services as well. So, it seems to me that we’re kind of locking some groups into a continued future of being under funded when our needs in our state are becoming greater with unemployment still at really high levels

Bear in mind that Missour’s infrastructure was in sad shape long before the recession; Missouri’s bridges, for example, are the seventh worst in the nation in terms of decay. Also stop to consider that Missouri is already a very low tax state – 43rd lowest in the nation.

Wouldn’t this low tax status combined with the need for greater social, educational, and physical infrastructure investment lead one to think that Missouri’s legislators would be better employed if they were to spend some time overhauling the moribund state tax system, or perhaps looking for some revenue enhancements, like setting up a mechanism for collecting Internet sales taxes, or raising cigarette taxes that are also much lower than in most states? But such rational activity, of course, would mean abandoning ideology for reality.