Category Archives: Debt and deficits

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

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

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

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.

We won the lottery, but who bought the ticket?

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

Should welfare recipients be required to pay back the state if they win the lottery? Maybe the better question is, should all of us?

Those questions came to mind after hearing a presentation by Rep. John Payton, R-Wilburn, of his House Bill 1825 before the House Rules Committee at the State Capitol Wednesday.

The bill would require lottery winners to reimburse the state for their last 10 years of Department of Human Services benefits, such as the Supplemental Nutrition Assistance Program, formerly the food stamp program.

Payton said the lottery is a bad deal for poor people, who gamble their sparse dollars with the odds stacked mightily against them. This arrangement would make them think twice about doing that and remind them that their benefits come from the taxpayers.

In addition to Payton, the bill has 26 co-sponsors in the House, but it’s likely not going far. One committee member requested a fiscal impact statement, which will delay the bill’s progress. Legislators are hoping to go home at the end of March, which is fast approaching.

Still, if part of the idea is to make welfare recipients consider the source of their government benefits, then let’s consider the bigger picture: As a nation, we are all receiving government freebies.

In 2017, the Congressional Budget Office projects the United States government will spend $4 trillion but collect only $3.4 trillion, producing a deficit of $559 billion. That means the government is spending about $1,700 more than it collects per American, or almost $7,000 for a family of four.

Think you don’t benefit from that? Of that $4 trillion, almost a fourth went to Social Security in 2016, which benefits all of us – recipients directly, future recipients because it offers a guaranteed retirement plan, and families because they expend fewer resources taking care of their elderly relatives. (Yes, there’s a trust fund – but not really. In effect, the tax dollars go into one pot.) Another $588 billion goes to Medicare, which offers the same benefits. About that same amount pays for the United States to maintain by far the largest military in the world, which we’re all generally glad we have even if some of us would be OK with it being a little smaller.

Need more examples? The interstates on which we drive are no longer funded entirely by the gas taxes we pay at the pump. They are now funded partly out of the indebted general fund. The public schools we attend at a cost of $9,400 per Arkansas student annually also are funded partly by federal dollars and therefore by federal debt. And contrary to popular belief, only 1 percent of the budget goes to foreign aid, which often directly benefits Americans (for example, by buying food produced in America).

Finally, and this is really important, deficit spending does more than just allow these popular programs to continue. It infuses the economy with extra cash borrowed from future generations without their permission – stolen, in other words. We all live better because the government is writing $559 billion in hot checks this year, and putting it into the economy. Modern American life is being propped up by our grandchildren’s labor.

The frustration that many Americans feel toward welfare recipients is based on their belief that they are receiving unearned benefits that trap them in a cycle of poverty. And yet as a nation we are all receiving unearned benefits that trap us in a cycle of debt. These habits enable us to buy prosperity and security we have not fully earned. We’re all welfare queens, which is why the national debt – the accumulation of all these annual deficits – has reached $19.9 trillion, or more than $61,000 for every American. Most of that has accumulated in the last 16 years, meaning we were the ones who benefitted most.

There will come a point when the nation either chooses a different path, or is forced to do so. At some point in the future, the bill will come due. It always does.

If you and I are not around, then congratulations to us. We lived in a rich country during a rich era, and we received a lot of government benefits we never had to pay for.

In other words, we already won the lottery.