Pay It Forward?

As noted in several of our On the Docket posts, the Budget Committees in both the Senate and the Assembly have convened a series of hearings to review proposals for modifying the budget process recommended by the organization California Forward. Monday’s Assembly Budget Committee hearing focused on California Forward’s proposal to impose a “pay-as-you-go” requirement to some new spending and/or tax cuts.

As a self-proclaimed budget wonk, I have a certain amount of sympathy for the concept of pay-as-you-go. It also is resonant with the CBP’s belief that budgets are about values, choices, and priorities and that there is no such thing as a free lunch. However, in this instance, as in virtually everything having to do with the budget process, the devil is in the details. And, in the case of the California Forward proposal, the details show that there is a lot less to the proposal than meets the eye. Perhaps the best way to explain what the California Forward proposal would do is to look at what it would not do. As proposed in ACA 4 (Feuer) and AB 2591 (Feuer), the proposed rules would not have applied to:

  • The “dark of night” tax cuts enacted in the September 2008 and February 2009 budget agreements;
  • The establishment of a “3 percent at 50” safety retirement formula;
  • The rising cost of General Obligation bond debt service, which nearly doubled from 1999-00 to 2009-10; or
  • Prison spending, including spending ordered by the federal receiver overseeing medical services, which is the fastest growing area of the budget.

How so? The proposal would not require spending increases or tax cuts to be paid for if they are the result of:

  • A “statute enacting a budget implementation bill;”
  • Costs related to state worker union contracts that are approved by the legislature;
  • The budget act;
  • Costs incurred for general obligation bond debt; or
  • Costs required by federal law.

The proposals would also allow the Legislature, by a two-thirds vote, to waive the pay-as-you-go requirement with a simple declaration that a measure would not result in added costs or lower revenues. This type of disclaimer could easily lead to claims that tax cuts “pay for themselves” despite economic and fiscal evidence to the contrary. Such claims are made now, even in the absence of pay-as-you-go rules. Consider, for example, the statement in a recent legislative analysis of the sales tax exemption for alternative energy and transportation projects enacted by SB 71 (Padilla) that, “According to the Department of Finance, the program would have no impact on the budget, since absent the program, the projects approved by CAEATFA would not have occurred.” (The CAEATFA is the authority within the Treasurer’s Office that would administer the exemption).

Perhaps most troubling are the exemptions for bond debt service and “budget implementation” bills. The former because bonds impose a 20- to 30-year obligation on the state that cannot be reversed once a bond has been sold if priorities change or good economic times turn bad. The exemption for budget implementation bills is troubling because of the breadth of what might be considered a budget implementation bill and the fact that it would likely result in an even larger share of state policymaking occurring through the budget process – so as to circumvent pay-as-you-go requirements – where lawmaking is often rushed and where tradeoffs and major decisions often occur behind closed doors with little notice or opportunity for public review, and away from the policy committee process.

Even more fundamentally, absent a level playing field between spending and taxing – the California Forward proposals would allow a budget to be approved by majority vote, but would retain the two-thirds requirement for state tax increases – a pay-as-you-go rule would also tend to pit universities against the elderly and parks against child care, rather than program demands against obsolete tax loopholes.

What’s a reasonable alternative? Congress operates under a pay-as-you-go requirement contained in the rules that govern the operation of the House and the Senate. This approach imposes fiscal discipline without sacrificing flexibility or limiting the ability of Congress to respond to emergencies ranging from natural disasters, such as Hurricane Katrina, to the economic calamity of the Great Recession.

— Jean Ross

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