Category Archives: Debt and deficits

Tax cuts and rosy scenarios

Debt and deficits, Politics, State government, U.S. Congress

By Steve Brawner
© 2017 by Steve Brawner Communications, Inc.

Let’s say you’re planning next year’s family budget.

Should you (A) be honest about what you’ll probably spend and as realistic as possible about your likely income, taking into account there could be an unexpected downturn? Or (B) assure yourself you’ll get a big raise, tell yourself prices will fall, increase your spending, and obligate yourself based on a rosy scenario?

I hope you answered (A). Otherwise, I didn’t do a very good job writing that first paragraph. If you’re the architects of President Trump’s first budget outline, you instead chose (B).

The budget, released tellingly while Trump is out of the country, promises to transform the annual budget deficit that will be $559 billion this year into a $16 billion surplus by 2027. We’d still have the national debt – currently $20 trillion and growing – but at least we wouldn’t be adding to it.

Unfortunately, the budget relies on that aforementioned rosy scenario to get there.

On the spending side, it increasing money for defense while proposing cuts to spending programs, including popular ones such as Meals on Wheels, that are so deep that even conservative Republicans in Congress won’t support them. Meanwhile, it leaves untouched the primary drivers of the increasing national debt, Social Security and Medicare.

Meanwhile, Trump is promising tax cuts he says will spur so much growth they’ll pay for themselves – a promise that won’t come true, according to the nonpartisan Committee for a Responsible Federal Budget. Moreover, Trump’s budget relies on projections of 3 percent economic growth per year – an unrealistic number, considering the Congressional Budget Office expects the economy instead to grow 1.8 percent annually over the next decade.

I said “unrealistic,” not “impossible.” According to the Committee for a Responsible Federal Budget, the economy has averaged 3.2 percent growth since 1950, and there have been times when it grew even faster – 4.3 percent in the 1960s and 3.5 percent in the 1990s.

The difference between now and then is us, says the Committee. We’re now an older country, and certain to grow older. The baby boomers are now retiring, and retired people produce less than working people. Meanwhile, as the number of older Americans increases, so does the number of people accessing Medicare and Social Security, which, you’ll recall, President Trump’s budget doesn’t touch.

Given the fact that 70-year-olds don’t usually have children, the fastest way to reduce the age of the workforce is to import workers from the outside. But even that would be only a partial solution causing other problems. Besides, as you may have noticed, increasing immigration is not exactly a priority of the president’s, or of Arkansas’ Sen. Tom Cotton, for that matter, who argues that immigrants compete with Americans for lower-wage jobs.

It’s possible that some kind of private sector advance could spur the economy, much as the dot-com bubble helped make the 1990s boom possible. But remember, we call that a “bubble” for a reason. Anyway, we’re already in the middle of one of those advancements. Technological innovations have let the United States approach energy independence, and gasoline is cheap right now. Nevertheless, the economy’s been plodding along for years – not terrible, but not great.

Because of all these factors, the Committee for a Responsible Federal Budget says Trump’s plan will reduce revenues by $5.5 trillion. This would occur at a time when government expenditures for Social Security and Medicare are destined to increase, as will interest payments on the debt. And let’s face it, Congress isn’t going to cut spending drastically for Meals on Wheels.

Instead, the U.S. government should do what a prudent family does: Base its budgeting on what’s likely to happen – actually, worse than that – and on the basic math principle that subtracting from your income does not add to it. It doesn’t have to expect the worst-case scenario, but at least it shouldn’t depend on a rosy one.

Related: $23.33 less debt

State tax cuts: First answer ‘How?’ and then ‘How much?’

Debt and deficits, Legislature, Politics, State government

By Steve Brawner
© 2017 by Steve Brawner Communications, Inc.

Your state taxes were cut by $100 million in 2015 and about half that much this year. In 2019, Gov. Asa Hutchinson and state legislators intend to cut them again.

But with state budgets growing tighter, “How?” is a more important question than “How much?”

To answer both questions, and others, legislators during this past session created a task force that will study the state’s tax code before producing proposed legislation by September 2018, 16 months from now.

The Tax Reform and Relief Legislative Task Force met for the first time Monday and elected two level-headed and practical-minded co-chairmen, Rep. Lane Jean, R-Magnolia, and Sen. Jim Hendren, R-Gravette. Jean is co-chairman of the Joint Budget Committee, while Hendren, Hutchinson’s nephew, has co-chaired two other task forces, one for school employees’ health insurance and one for health care.

Hutchinson likes to use these task forces to form a consensus on tough issues, to create a forum for discussion, or, if nothing else, to buy time. So far, they’ve mostly resulted in the policies he wants or, in the case of highway funding, provided a convenient back burner on which to place subjects he’d rather address later. They tend to lead to considered, incremental change so that radical legislation doesn’t slip through during legislative sessions, when things happen fast and can get crazy. Looking back, he might wish he’d created one for guns on college campuses.

The tax cuts enacted so far have benefited mostly the middle class (in 2015) and lower-income Arkansans (in 2017), so some legislators believe it’s time to help out Arkansans earning $75,000 a year or more in taxable income.

But simply cutting taxes will be difficult in an era of tight budgets. Hutchinson in April cut spending by more than $100 million over the next two years because sales and corporate income taxes aren’t meeting projections. These were not devastating cuts because they occurred in the so-called “category B” funding, which is the kind agencies know beforehand may not be available. But the timing, occurring after the latest tax cuts, was a little concerning.

There’s fat in any government budget, of course, and state government is no exception, but certain expenses are hard if not impossible to cut. Health care costs rise regardless of what the state does. The state is locked into always providing at least a token increase in public school funding lest it be sued again for failing to follow its own Constitution. Those highways don’t fix or build themselves.

So while legislators certainly will want to cut taxes, they’ll be spending a lot of time on tax reform – making the tax code simpler and more competitive with neighboring states such as Texas, which doesn’t have an income tax.

The only way to cut taxes much without blowing a hole in the budget is by ending some of the deductions that litter the tax code, but those politics will be challenging. Sitting in those committee meetings will be lobbyists whose clients benefit from those deductions. They will make persuasive cases through logical arguments and through past and future campaign donations. And when their clients’ members are mobilized and vocal – for example, all the farmers in a legislator’s district – they can be hard to vote against.

Meanwhile, legislators will seek to avoid the experiences of Kansas. Five years ago, Gov. Sam Brownback slashed taxes but not enough spending, saying that the resulting economic growth would create sufficient new revenues, because money grows on trees. Those revenues didn’t materialize, the state has been a mess ever since, and now legislators there are arguing about what to do about a huge budget deficit.

Brownback called his tax cut plan in Kansas an “experiment.” Arkansas’ tax task force has 16 months to apply the lessons learned – hopefully, by answering first “how” before considering “how much.”

Steve Brawner is an independent journalist in Arkansas. Email him at brawnersteve@mac.com. Follow him on Twitter at @stevebrawner.

For the rest of us, there’s non-teacher retirement

Debt and deficits, Legislature, Politics, State government, U.S. Congress

By Steve Brawner
© 2017 by Steve Brawner Communications, Inc.

Could Arkansas’ efforts to strengthen a program serving 43,000 offer an example for Congress to fix programs serving 60 million?

During this past legislative session, Arkansas lawmakers took steps – baby steps for sure, but steps – that might shore up the state’s Teacher Retirement System. Actuaries had determined it would take the system 29 years to catch up with the payments it will make to current and future retirees, and that’s too much. In the past, 30 years was considered acceptable, but the Government Accounting Standards Board has lowered that number to 18. Anything longer risks hurting the state’s bond rating and increasing the borrowing costs for schools and roads.

Because big fixes are hard, the system’s managers requested the flexibility to implement numerous little ones. Laws passed this session let the system’s board of trustees increase the rates paid by school districts and by current teachers if the projected payoff exceeds 18 years. Various retirement benefits could be reduced, and the system will be funded by school districts employing contracted employees working for private providers.

In other words, the Teacher Retirement System is not meeting professional standards meant to assure long-term survivability. So in response, the Legislature gave a governing entity the flexibility to make changes, rather than doing it in the politically charged halls of the State Capitol, where laws can be hard to pass and harder to change.

It remains to be seen if the changes will work. It could be that the state’s retirement systems need bigger fixes. The point is, fixes are being attempted for a popular retirement system serving 43,000 current beneficiaries, and those fixes involve less debt, not more. Solving the problem will require some people to pay more or get less, and these people vote.

Let’s compare that to the federal government’s programs that serve 60 million people. Social Security and Medicare both face long-term funding issues far more serious than the state’s Teacher Retirement System. According to the nonpartisan Committee for a Responsible Federal Budget, the trust fund for Medicare Part A, which covers hospital payments, runs out of money in 2025, and then it will have to rely solely on the taxes being paid at the time. At that point, doctors and hospitals under the law will face a 13 percent pay cut, leading some to simply stop seeing Medicare patients. Social Security’s trust fund runs out of money in 2034, at which point all recipients under current law will receive an automatic 21 percent cut. The trust fund has been borrowed from to pay for the government’s other programs, but the government has promised to pay it back, so we’ll just have to take its word for it.

The numbers don’t work and will grow worse as the baby boomers age and retire. By 2027, the costs of mandatory spending programs, of which Social Security and Medicare are the major parts, plus interest on the national debt will equal 99 percent of all federal revenues. That means, 10 years from now, 1 percent will be left for everything else the government does, including the military, which means even more borrowing. In the following decades, the unfunded liabilities for Social Security and Medicare reach incomprehensibly high numbers in the trillions of dollars.

Unlike the Teacher Retirement System, there is no mechanism for boards of trustees to tweak the systems, because the financials are locked into law. In fact, because the programs are considered to be “mandatory,” Congress doesn’t even take a hard look at them. Moreover, the spending is not governed by anything like that 18-year provision. The government just pays more year after year until the programs hit the wall in 2025 and 2034, and then benefits suddenly will be cut.

Whether it’s the Teacher Retirement System, Social Security or Medicare, when revenues doesn’t meet expenses, policymakers have three choices: more revenues, less expenses, or some combination of both. Congress has chosen the easier fourth option: Do nothing because the consequences happen long after the next election.

Could Congress, which long ago decreed the changes would happen suddenly in the future, instead somehow make them happen gradually and less painfully – using some of the same principles adopted by the Legislature? The pain could be lessened by addressing the problem now, even though it would involve some people paying more or getting less, and those people vote.

Hopefully, Congress will do something. Most of us aren’t teachers, but most of us hope to retire, eventually.

Related: $23.33 less debt

$23.33 less debt

Debt and deficits, Legislature, Politics, State government, U.S. Congress

By Steve Brawner
© 2017 by Steve Brawner Communications, Inc.

The past couple of weeks showed two different ways to react when you don’t have enough money coming in: the Arkansas state government reaction, which is relatively effective, and the federal reaction, which isn’t at all.

Why the difference? One big reason is that Arkansas has a structure for responding to budget shortfalls and, more important, a culture that respects that structure. The federal government has neither nor the structure nor the culture.

Let’s start with Arkansas. The state’s budgetary decisions are governed by the Revenue Stabilization Act, a law passed in 1945 that is amended by the Legislature each budget cycle and sets the parameters for a balanced budget. Under the act, state spending is divided into categories: an essential Category A and a much smaller, spend-it-if-we’ve-got-it Category B.

State revenues this year have been a little lower than was budgeted because sales and corporate income tax revenues are lower than expected while income tax refunds have been higher.

Faced with a deficit, on Friday Gov. Asa Hutchinson announced that various state agencies would see total cuts of $70 million in Category B (out of a $5.33 billion general revenue budget) to make up the difference. The announcement took up part of a half-hour news conference that also covered the death penalty and the health care-related legislative session occurring this week. And that was that.

Contrast that with what happened in Washington, D.C., where members of Congress, faced with a looming government shutdown, managed last week to pass a continuing resolution to fund the government for another week – a process that happens so often these days that Americans hardly even notice anymore. Then on Monday it was announced that the Trump administration and Congress had agreed to a $1.1 trillion spending bill that increases money for defense and other areas while not cutting much elsewhere. The bill does not affect Social Security and Medicare, the government’s biggest programs, which Trump has vowed not to cut.

This is happening within the context of a federal government that is expected this fiscal year to spend $4 trillion but only collect $3.4 trillion, leaving a $559 billion deficit ($1,731 per American) that is being added to the $20 trillion national debt ($62,000 per American).

Meanwhile, President Trump released the bare outlines for tax cuts that the nonpartisan Committee for a Responsible Federal Budget guesstimates will reduce federal revenues by $5.5 trillion over the next decade. His administration promises the tax cuts will spur enough economic growth to pay for themselves, but history has shown that rosy scenario simply won’t happen. History has shown, however, that when a president calls for tax cuts, there’s a good chance taxes will be cut.

For comparison, the federal government’s deficit for 2017 is 14 percent of expected expenses, and nothing is being done to close the gap. In Arkansas, the $70 million shortfall – $23.33 per Arkansan – was 1.3 percent of the state budget, and Hutchinson filled it with nary a peep from the Legislature or the affected agencies.

So why can’t Uncle Sam do what Gov. Asa did? There are many reasons, but one of the biggest is the fact that the federal government doesn’t have effective structural controls like the Revenue Stabilization Act.

A national Revenue Stabilization Act is not the answer. Letting the president unilaterally make cuts would give him or her too much power and would be unconstitutional. One potential solution is an amendment to the Constitution requiring a balanced budget, an idea that goes back to the Founding Fathers. Sometimes that idea gains some traction, but there always have been too many opponents who’ve stopped it without offering a better idea.

Even if it were to pass, the culture of Washington still would have to be changed. A balanced budget amendment could be bypassed like other parts of the Constitution are bypassed now.

On the other hand, a structure helps create a culture. Gov. Hutchinson acted so decisively and uncontroversially in 2017 in large part because the Revenue Stabilization Act, passed in 1945, has become ingrained in the way we do things here over the past 72 years.

Regardless, future generations of Arkansans can be thankful they someday won’t have to pay back that $23.33.

They can apply it to the $20 trillion.