States across the country are rethinking tax reform to stay competitive for residents and businesses. Many are exploring ways to phase out personal income, business franchise, and property taxes to attract workers, foster economic growth, and ensure property rights. But doing so requires careful planning to ensure stability and fiscal responsibility.
One of the most important decisions in this process is choosing the right mechanism to trigger tax cuts. Two common approaches are revenue triggers and surplus triggers. While both have their merits, surplus triggers are far more reliable and sustainable. They base tax cuts on actual fiscal surpluses rather than optimistic revenue projections and address the core problem of government: spending. Why Spending Limits and Surplus Triggers Make Sense Tax reform doesn’t happen in isolation—it needs to be part of a broader strategy to limit government growth and promote fiscal discipline. This is where spending limits come into play. A spending limit ties annual increases in government spending to measurable factors like population growth and inflation. By keeping spending under control, surpluses naturally occur when revenues grow faster than the spending limit, creating the perfect opportunity for meaningful tax cuts. Here’s why a surplus trigger, paired with a spending limit, is the best approach for phasing out taxes: 1. Stability Over Speculation Revenue triggers rely on meeting specific revenue targets before tax cuts are implemented. While this sounds straightforward, it assumes continuous economic growth—a risky gamble. If revenues fall short due to economic downturns or other factors, tax cuts may be delayed or reversed, creating uncertainty for taxpayers and businesses. Surplus triggers, on the other hand, only initiate tax cuts when there are genuine excess funds at the end of the year. This approach ensures that tax relief is stable, reliable, and based on real financial health rather than speculation. 2. Encouraging Fiscal Discipline A surplus trigger works hand-in-hand with a spending limit, which naturally generates surpluses by controlling government expansion. This ensures that tax cuts are backed by actual savings, not temporary windfalls. Revenue triggers, by contrast, don’t address the root cause of fiscal instability—unrestrained spending. Without limits, even rising revenues can be outpaced by unchecked spending growth, leaving little room for tax relief. By focusing on spending, surplus triggers encourage long-term fiscal discipline, making tax reform sustainable. 3. Reducing the Risk of Tax Reversals Revenue-triggered tax cuts can be politically fragile. If revenue growth slows, lawmakers may feel pressured to raise taxes again, undermining the entire reform effort. Surplus triggers avoid this problem by tying tax reductions to actual fiscal conditions. This ensures that cuts are less likely to be reversed, providing certainty for taxpayers and businesses alike. How Surplus Triggers Work in Practice A surplus trigger takes the revenue collected above the spending limit at the end of each fiscal year and allocates it toward specific priorities. Here’s a practical example of how this can work:
Flexible, Sustainable Tax Reform Unlike revenue triggers, surplus triggers don’t lock states into rigid tax cut schedules. Instead, they allow flexibility to adjust the pace of tax reductions based on actual surpluses. This makes a complete phase-out of the income tax achievable within a reasonable timeframe, such as a decade, while ensuring that essential services and fiscal stability are preserved. When combined with a spending limit, surplus-triggered tax relief delivers significant economic benefits. Lower income taxes increase disposable income for families, encourage consumer spending, and attract businesses looking for a more favorable tax environment. Over time, the resulting economic growth broadens the tax base, generating additional revenue from sales and property taxes to offset the reduced reliance on income taxes. Research shows that phased tax relief can drive billions in economic growth and create thousands of new jobs. It’s a strategy that not only improves the fiscal health of the state but also enhances the quality of life for residents. The Bottom Line Surplus triggers, paired with a spending limit, offer a sustainable and disciplined path to meaningful tax reform. They provide a reliable framework for reducing and eventually eliminating personal income taxes, ensuring that tax cuts are based on real fiscal health rather than speculative revenue growth. By focusing on spending restraint, states can achieve tax reform that is both responsible and transformative, paving the way for economic growth and competitiveness for years to come. The choice is clear: surplus triggers are the smarter, more stable way to deliver lasting tax relief and fiscal stability.
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Similar version originally published at Texans for Fiscal Responsibility.
As Texas faces rising property taxes and record-high government spending, it’s time to reassess the path toward long-term prosperity. Recent data illustrates Texas’ strengths and challenges. In August 2024, Texas maintained a 4.1% unemployment rate, while the state’s GDP grew by 3.5% in Q2 2024, outpacing national averages. However, the last legislative session resulted in unprecedented government spending increases, threatening Texas’ fiscal stability. The solution is clear: spending cuts, lower taxes, and imposing the strongest possible spending limits on state and local governments. This can be done by ending excessive spending of at least $30 billion, which is a 15% cut in state funds. Corporate Welfare: A Drain on Taxpayers of $10 billion New constitutionally-dedicated funds like the $5 billion to Texas Energy Loan Fund, $1 billion to Texas Water Fund, and $1.5 billion to Texas Broadband Infrastructure Fund create even more opportunities for contractors and financial firms to benefit at the taxpayer’s expense. Expanding these programs is already being discussed, adding to concerns about unchecked government spending. Not spending these funds and instead redirecting them toward broad-based tax relief would benefit all Texans, not just a select few private entities. Other corporate welfare programs like the Texas Enterprise Fund (TEF) and Chapter 403, the newly revamped property tax abatement program that replaced the expired Chapter 313, continue to burden taxpayers. Overfunding the Government School System by $17 billion Annually Texas is overfunding its monopoly government school system, spending billions of dollars annually on a system that lacks competition and efficiency. A transition to universal Education Savings Accounts (ESAs) would inject competition into the education sector, allowing parents to choose the best educational options for their children. Moving to universal ESAs could save the state an estimated $17 billion per year by allowing the state to spend $12,000 per 6.3 million school-age kids instead of $16,792 per 5.5 million enrolled at government schools. These savings could be used to eliminate school property taxes, providing meaningful relief for homeowners and fostering a more dynamic, competitive education system. Medicaid Reform: Lowering Costs with HSAs for Savings of At Least $3 billion Annually Healthcare spending, especially through Medicaid, is another area where Texas can find significant savings. Shifting Medicaid recipients to work requirements and Health Savings Accounts (HSAs) would encourage more cost-effective healthcare decisions, saving the state at least $3 billion annually. These savings could then be applied toward property tax relief, allowing Texans to benefit from lower overall taxes while promoting personal responsibility in healthcare. Achieving Property Tax Elimination Through Fiscal Discipline By combining savings from eliminating corporate welfare, passing school choice, and reforming Medicaid, Texas could save at least $30 billion per year. These funds could eliminate most, if not all, school district M&O property taxes, providing substantial relief for homeowners. It is also critical to enact the strongest possible constitutional spending limit, tying state and local government spending growth to a maximum of population growth plus inflation. But with record spending increases in the most recent legislative session, including the creation of the Texas Water Fund and Texas Broadband Fund, it’s crucial to cut government spending, pass Frozen Texas Budgets, and provide fiscal responsibility. Securing Texas’ Economic Future Texas is at a crossroads. While the state’s economy remains relatively strong, with low unemployment and impressive GDP growth, the rapid rise in government spending, corporate welfare, and property taxes pose significant risks to its long-term success. Texas can secure a prosperous future by embracing a strategy of lower taxes, spending restraint, and market-driven reforms. Eliminating corporate welfare, expanding school choice, and adopting Medicaid reform will unleash the opportunity to eliminate school district M&O property taxes, allowing Texans to keep more of their income and ensuring that the state remains a beacon of economic freedom. Originally published at Texans for Fiscal Responsibility.
Texas is at a critical point in addressing its housing affordability crisis. As the property tax burden on Texans is at historic highs, the State’s housing market faces serious challenges that drive up costs and limit access to affordable homes. Solving this crisis requires a bold approach to removing restrictive zoning laws, reforming property taxes, and pursuing paths that enable true homeownership. Property Taxes are Soaring, Limiting Homeownership Property taxes in Texas have risen sharply in recent decades. Data from Texas Comptroller shows that total property taxes in Texas have skyrocketed from nearly $19 billion in 1998 to over $81 billion in 2023—a staggering 328% increase over 25 years. Most of this growth comes from school districts and local governments, where spending has far outpaced population growth and inflation. Despite the recent relief push, property taxes remain an ever-growing burden, keeping many Texans from achieving affordable homeownership. Restrictive Zoning Laws Inflate Housing Costs Restrictive zoning policies are another roadblock to affordable housing. By limiting where and what types of homes can be built, these zoning restrictions constrain housing supply, causing prices to rise. Opening up zoning could allow developers to build more homes, increasing competition and reducing costs for prospective buyers and renters. Such zoning reforms would enable the Texas housing market to meet demand more effectively, driving down prices and making homeownership more attainable for all Texans. The Case Against Rent Control and for Free-Market Solutions Some advocate for rent control to address housing affordability, but this policy only exacerbates the problem. Rent control limits lead to reduced housing supply, lower property maintenance standards, and an overall decline in housing quality. Texas should adopt free-market solutions instead of price controls that distort the market. Reducing zoning restrictions and property taxes provides a far more sustainable approach, encouraging private investment and expanding housing options without compromising quality. A Path to Property Tax Elimination True homeownership means owning a home without a continuous tax burden. For Texans to experience this freedom, we need a serious commitment to eliminating property taxes. Here’s a practical approach:
Several states are already exploring ways to move away from property tax dependence. For instance, North Dakota and Wyoming could soon eliminate property taxes, offering a potential model for Texas. By setting ambitious targets, these states show that property tax elimination isn’t just an idealistic vision—it’s a practical policy choice that puts residents on the path to true home ownership. Political Courage is Key Implementing these solutions requires political will and determination to prioritize Texans’ well-being over short-term spending interests. Texas lawmakers need to recognize that high property taxes are not just an inconvenience—they’re a barrier to affordable living, an obstacle to homeownership, and an economic drain that weakens communities. Texas can lead the nation in housing affordability and economic freedom by reducing zoning restrictions, enforcing strict levy limits, and working toward eliminating property taxes. Conclusion: A Sustainable Solution to Housing Affordability The housing affordability crisis in Texas won’t be solved overnight, but a commitment to sustainable, free-market reforms can provide real relief. By removing restrictive zoning, eliminating property taxes, and rejecting failed policies like rent control, Texas can make homeownership affordable and achievable for more people. Now is the time to pursue policies that support true homeownership, economic freedom, and prosperity for Texans. Let’s choose a path that addresses the root causes of our housing crisis, unleashing the potential for a thriving, accessible housing market. Chairman Bettencourt and members of the committee, Thank you for holding this hearing. I am Dr. Vance Ginn, president of Ginn Economic Consulting, Texan, and father who is concerned about Texas's housing affordability crisis. While the state can’t address general inflation and interest rates, as those have been failures of Washington, policymakers can tackle restrictive local zoning and high property taxes. First, restrictive zoning regulations restrict the housing supply, driving up housing prices faster than many can afford.
Second, regarding the 11th most burdensome property taxes, achieving affordable housing means committing to eliminating them.
These reforms can benefit Texans, but achieving them will require political courage. Combining local zoning reform with a path to eliminate property taxes provides a practical approach to housing affordability that the Legislature can accomplish in the next session. Thank you for considering these ideas to remove government obstacles and make housing affordable for Texans. Vance Ginn, Ph.D., is president of Ginn Economic Consulting and contributor to more than 15 think tanks, including Americans for Tax Reform and Texans for Fiscal Responsibility. Dr. Ginn was previously a lecturer at multiple higher education institutions, chief economist at the Texas Public Policy Foundation, and chief economist at the White House's Office of Management and Budget. He earned his doctorate in economics at Texas Tech University. Follow him on X.com at @VanceGinn and get more of his research at vanceginn.com. The Case for Eliminating Property Taxes: What North Dakota’s Vote Means for True Homeownership11/5/2024 Originally published at American Institute for Economic Research.
On November 5, North Dakota will vote on Measure 4, a ballot measure that could make it the first state to eliminate property taxes. This decision isn’t just a local concern; it’s a critical moment that could shape the future of property tax reform nationwide. If successful, the measure will challenge the notion that property taxes are a permanent fixture, forcing us to reconsider the tax model that has held American homeowners in a perpetual cycle of payments to the government. While Measure 4 opens a path toward exploring tax systems that foster true homeownership and economic freedom, there’s a significant caution. Without first eliminating personal income taxes and establishing a clear, structured plan to replace funding for essential government services, North Dakota could face fiscal and economic headwinds. Property Taxes: An Endless Burden on Homeowners Property taxes impose a recurring burden on homeowners, functioning as an annual wealth tax that rises yearly, driven by local government assessments and tax rates. Even once a mortgage is paid off, homeowners must continue to pay these taxes, making them permanent renters from the government. This system is particularly harmful to retirees, fixed-income earners, and families trying to keep up with rising housing costs. Property taxes create a compounding burden in Texas and elsewhere due to rising property values assessed by government appraisers and rates set by various taxing entities. This “double impact” on property taxes drives many taxpayers to the edge financially, even if they’ve lived in their homes for decades. The reality is that property taxes are an economic anchor, tying property owners to the whims of government budgets and leaving little flexibility to opt out of escalating taxes. Appraisal limits, like those in California’s Proposition 13, attempt to keep assessments under control. Still, they result in an inequitable “lock-in” effect that penalizes new buyers with higher rates and discourages turnover. This system has also increased housing prices, making it harder for new buyers to enter the market while reducing the motivation for existing homeowners to downsize or relocate. Why Eliminate Income Taxes First? The best starting point for states looking to reform their tax systems is elimination of the income tax. Income taxes directly tax labor and productivity, discouraging work and reducing individual take-home pay. States that have avoided income taxes — like Texas, Florida, and Tennessee — have seen impressive economic growth and strong net migration rates due to their lower tax burdens and other factors. Florida and Tennessee, though not Texas, have managed to keep property taxes more reasonable by practicing better local spending restraint and avoiding the need to offset forgone income taxes with higher local taxes. This approach fully incentivizes labor and draws businesses and families seeking a more favorable tax environment. Once income taxes are removed, states can focus on property taxes, which burden homeownership by taxing unrealized gains on property values, acting much like a wealth tax. Without income taxes, states can adopt more consumption-based models, particularly a flat final sales tax, that avoids taxing wealth or earnings directly and ties tax burdens to individuals’ activity in market. This sequence of reform — income tax elimination followed by property tax reduction — can lay a solid foundation for sustainable growth and homeowner stability. How North Dakota and Texas Can Lead on Property Tax Reform North Dakota has an opportunity to demonstrate that a state can operate without property taxes, but success requires spending control and careful planning. Although critics argue that the estimated $3.15 billion biennial revenue from property taxes funds vital services, North Dakota’s $11 billion reserve fund, and strong oil-driven revenue give it unique fiscal flexibility. The state would benefit, however, from placing spending limits tied to population growth and inflation, similar to Colorado’s Taxpayer Bill of Rights (TABOR), to ensure that budget growth does not erode tax relief. Texas, too, provides a relevant case study. Over the past decade, Texas lawmakers have allocated funds to reduce school district maintenance and operations (M&O) property taxes, but excessive state and local government spending has minimized the relief’s impact. Despite a $32.7 billion surplus last year, only $12.7 billion was used for property tax relief, with most of the rest going toward increasing state spending, which increased by a record 32 percent. The result was minimal total property tax reduction because other local taxing entities raised their property taxes substantially. Without strict state and local spending caps, even substantial surplus funds can fail to yield lasting tax relief. The Cautionary Note for North Dakota’s Measure 4 While North Dakota’s vote on Measure 4 is a bold step, it comes with potential pitfalls. With a well-defined replacement plan for the revenue currently generated by property taxes, the state could avoid fiscal challenges that offset the intended benefits of property tax elimination. Measure 4 leaves it up to the state legislature to devise a revenue strategy. Essential services could suffer budget shortfalls, forcing the state into difficult cuts or prompting alternative tax increases. Furthermore, the absence of a strategic plan could lead to ad hoc fiscal decisions, causing instability for residents and uncertainty in budgeting. To make property tax elimination feasible, North Dakota must adopt firm spending controls to match any revenue replacement strategy. By securing the proper fiscal framework, the state could avoid potential pitfalls and ensure that this ambitious tax reform strengthens, rather than destabilizes, its economic foundation. Addressing Both State and Local Property Taxes The most effective approach is to address property taxes at the state and local levels. States should take the lead in eliminating school district property taxes, which often constitute a major portion of the overall property tax burden. In Texas, for example, school district taxes are “local” in name only, as state-level finance formulas heavily influence them. Once these are phased out at the state level, local governments should then work toward eliminating other types of property taxes, using surpluses and revenue growth to reduce rates to zero gradually. By creating a model that addresses school district property taxes through state policy and the rest through local adjustments, states avoid funneling taxpayer dollars to local governments to subsidize shortfalls. Prioritizing true local control prevents the inefficient redistribution of funds from state coffers to local budgets. Shifting to a Consumption-Based Tax Model Replacing property taxes with a consumption-based tax, such as a broad-based final sales tax, would align the tax system more closely with individual spending power. Unlike property taxes, levied regardless of a homeowner’s choices, sales taxes are paid when residents choose to spend. This method introduces flexibility for taxpayers, who can control their tax contributions more directly rather than bearing a constant, unavoidable tax burden on their homes. North Dakota could adopt a broader sales tax base or modest rate adjustments to offset lost property tax revenue while maintaining competitive tax rates. Tennessee and Florida offer strong examples of how states without income taxes have kept overall property tax burdens relatively low through spending restraints and controlled local budgets. Originally published by Kansas Policy Institute.
In a historic move toward greater accountability and transparency, the Kansas Legislature has taken the reins of the budget process by establishing the Special Committee on Legislative Budget. This change means lawmakers will no longer rely solely on the governor’s top-down budget proposal, which traditionally limited legislative review time and often led to rushed last-minute adjustments. Of course, there is no guarantee that these good intentions will lead to better decision-making. We need to look no further than Kansas’s years-old, toothless performance-based budgeting system to understand how noble intentions are often ignored in practice. Instead, this committee allows the Kansas Legislature to craft a budget that reflects the priorities of Kansas taxpayers by focusing on responsible spending and essential government functions. House Speaker Dan Hawkins and Senate President Ty Masterson emphasized in a recent press release that the committee will enable legislators to “ensure that Kansas taxpayers are getting the most bang for their buck.” By taking control of the budget process, the Kansas Legislature can create a streamlined, transparent approach that funds only essential services. This will clarify that government spending should be limited, targeted, and driven by performance, ultimately benefiting taxpayers. Shifting Toward Transparent, Efficient Budgeting Under the previous model, Kansas lawmakers often had mere days to review the governor’s budget report, with a complete budget bill only arriving weeks later. This limited timeframe hindered careful analysis and frequently led to budget bills packed with provisos—conditions attached to budget items without proper legislative scrutiny. These last-minute additions diluted transparency and often introduced spending items that lacked accountability. The Special Committee on Legislative Budget will allow lawmakers to begin budget reviews two months before the legislative session. This proactive, year-round approach enables them to assess agency budget requests through a performance-based lens, positioning Kansas to eliminate unnecessary spending while ensuring that every dollar spent delivers measurable value for Kansans. The approach also follows recommendations from my recent testimony before the Legislature’s Special Committee on Budget Process and Development. In my testimony, I highlighted the need for a structured, legislative-led budgeting process to keep Kansas on a fiscally responsible path. By implementing early, thorough budget reviews, Kansas is moving toward a disciplined approach that can curb government growth and, over time, provide tax relief to residents. Kansas’s new approach to budgeting draws on effective strategies from states like Texas, Colorado, and Florida, which have long upheld responsible budgeting through spending caps and efficiency audits. As noted in previous testimony, adopting a similar model that limits spending growth to economic conditions and rigorously reviews budget priorities can help Kansas curb unnecessary government expansion and pave the way for sustainable tax relief. A New Era of Fiscal Responsibility in Kansas The Kansas Legislature’s decision to create its budget through the Special Committee on Legislative Budget (hopefully) marks a new era of transparency, accountability, and fiscal discipline. With lawmakers leading the process, the state can ensure resources are allocated to core functions, wasteful spending is eliminated, and taxpayer dollars are carefully managed. This structure creates a measurable framework for budgeting. For example, Kansas agencies must demonstrate how their spending requests deliver value for Kansans through performance-based budgeting. Programs that fail to meet standards can be reevaluated or restructured, while successful initiatives receive the necessary support to continue. Such a system incentivizes less government involvement in the economy. In addition, this budget reform can open the door to tax relief over time. Kansas lawmakers are building a foundation for a leaner budget by focusing on limited, essential government functions. When spending is controlled and wasteful practices are eliminated, tax cuts become sustainable, benefiting Kansas residents and fostering a healthier economic environment. Conclusion With the Special Committee on Legislative Budget, Kansas has taken an important step toward responsible budgeting, following the examples of fiscally disciplined states. This new approach prioritizes taxpayer interests and establishes a transparent and accountable system that Kansas citizens can trust. As the committee begins its work, Kansas will benefit from a budget that upholds the principles of limited government and financial stewardship. This will ensure taxpayer dollars are spent wisely and pave the way for potential tax relief in the future. Let Americans Prosper Project: Ensuring Fiscal Sustainability for America's Future (Updated)11/1/2024 Introduction The U.S. stands at a critical crossroads, burdened with a mounting national debt from excessive government spending. This fiscal crisis threatens economic stability and future prosperity. While various fiscal reform proposals have been floated over the decades, the most recent pro-growth plan was former U.S. House Speaker Paul Ryan's FY 2012 budget. It avoided raising taxes and focused on reducing the deficit, reforming “entitlement” programs, and fostering economic growth. Today, these pillars have renewed significance and should be prioritized over any attempts to raise taxes. The Let Americans Prosper Project is vital, advocating for pro-growth policies such as tax and regulatory reforms, spending restraint, block grants to states, and work requirements for safety net programs so that America can achieve fiscal sanity before it is too late. The economic literature shows that raising taxes reduces economic activity while spending restraint promotes growth. The Congressional Budget Office (CBO) projects the U.S. federal government's gross debt to reach $34.8 trillion in FY 2024, with unfunded liabilities exceeding $100 trillion. Federal outlays are 23% of GDP and are expected to rise to 28% by 2054. Historical data indicates that reducing spending and promoting growth can decrease debt Successful reforms in the late 1990s and early 2000s included slowing spending growth and promoting economic expansion. About 70% of the federal budget comprises mandatory outlays, which are challenging to reform due to political risks. However, significant reforms are possible, as evidenced by past Medicaid and welfare reforms. Robust economic growth is crucial for a sustainable fiscal future. Lowering taxes and implementing pro-growth policies can stimulate economic activity and increase government revenues. Historical examples include the Reagan tax cuts and the 2017 Trump tax cuts, which led to significant economic growth. Adopting strict spending limits, similar to the Swiss debt brake or Colorado’s TABOR, can stabilize debt levels. A fiscal rule capping federal spending at the rate of population growth plus inflation could have significantly reduced the federal debt over the past two decades. Transitioning Medicaid and other welfare programs to block grants with work requirements can improve efficiency and reduce costs. This approach was successful in the welfare reforms of the 1990s, leading to decreased dependency and poverty rates. Introducing market forces and personal responsibility into programs like Medicare and Social Security can address the unsustainability of mandatory spending. Advocating for limited government and economic freedom can drive prosperity and fiscal sustainability. The Let Americans Prosper Project outlines a bold fiscal reform approach focused on lower spending, lower taxes, and reduced taxpayer burden to foster economic growth and ensure fiscal sustainability. Disciplined fiscal management and economic freedom are essential to securing America’s financial future. Spending Crisis Leads to Massive National Debt The economic literature has clearly shown that there are better ways to reduce deficits than raising taxes because it disincentivizes work and productivity, thereby reducing economic activity and lowering tax collections. Instead, cutting or slowing government spending has a better track record and can be pro-growth as it reduces government distortions to economic activity. Renowned economists Alberto Alesina, Casey Mulligan, John B. Taylor, and others, including my work on the Sustainable Budget Project with Americans for Tax Reform, have found spending restraint is the best path forward. The recent Congressional Budget Office (CBO) budget and economic outlook show the U.S. federal government’s gross debt will likely reach $35 trillion in FY 2024. But it gets worse: American taxpayers face unfunded liabilities—the net present value of spending commitments above expected revenues for programs such as Medicare and Social Security—of more than $100 trillion. The U.S. debt was 119.8% of the Gross Domestic Product (GDP) following World War II. Today, the debt is about 125% of GDP and is projected to climb to 257% by 2043. Federal debt held by the public is about 100% of GDP in FY 2024 and is expected to be 116% by 2034. Excessive spending leads to these unsustainable rising costs. Federal outlays are 23% of GDP but are expected to increase to at least 28% by 2054. Net interest payments of more than $1 trillion on the national debt are 16% percent of the total budget, the highest share since 2001, and will continue to climb. These net interest payments are about 3.7% of GDP, the highest share since 1999, and will likely increase to 6.2% in 20 years. Other nations have inflated away their debt or defaulted on it. That has yet to work well. After the debt rose to 119.8% of the economy in 1946, it was down to 31% of GDP by 1981, even though the budget was only balanced or in surplus for 8 of those 35 years. This was achieved through more economic growth and less spending. Past Budget Reform Effort Successes and Failures In the last three years of the Clinton administration, the federal budget was in surplus, along with the first year of the Bush, Jr. administration. However, the gross federal debt continued to increase as they exchanged debt with different maturities. The public's debt decreased by about $430 billion from 1998 to 2000 and $128 billion in 2001. President Clinton and the Democrat Congress had plans to spend every dollar of the 1993 tax hike plus $200 billion, the amount they felt was politically acceptable. Reagan had run such deficits. When Republicans captured the House and Senate in 1994, they refused to spend as Clinton wanted because of the work of Speaker Newt Gingrich and others. The capital gains tax was cut in 1997 from 28% to 20%, and the economy was spurred. Slower spending and more growth gave America four years of surpluses. Can we increase the economy's growth rate and slow the growth rate of federal spending again? We must! About 70% of the federal budget comprises mandatory outlays, such as Social Security, Medicaid, Medicare, Veterans benefits, national defense, and other expenditures. These are considered on automatic pilot because politicians don’t want to make necessary changes to these and risk upsetting voters, thereby not winning reelection. Unlike in the late 1990s, we cannot significantly cut spending by reducing domestic discretionary and military spending. The Clinton-Gingrich surpluses were largely made possible by the collapse of the Soviet Union and a decline in military spending from 5% to 4% of GDP, as well as by reforming safety net programs, which included beneficial work requirements for safety-net recipients. In the Obama years, the U.S. House voted to block grant programs such as welfare, food stamps, and federal housing programs to the states and capped their outlay growth. This is what Republicans did during the Clinton years for Medicaid and traditional welfare, Aid to Families with Dependent Children, now known as Temporary Assistance to Needy Families (TANF). Clinton refused to block grant Medicaid, but after vetoing welfare reform—block granting it to the states—he was reportedly told he had to choose whether to sign the welfare reform bill or lose the 1996 presidential election. He signed it. Welfare spending fell substantially, by as much as 30%, in most states after that as people went to work and provided for their families. Also during the Obama years, the Budget Committee Chairman and then-Republican House Speaker Paul Ryan led the House of Representatives to pass a budget called The Path to Prosperity: Restoring America’s Promise that block-granted most means-tested welfare programs and capped their spending growth. Those reforms covered Medicaid and welfare programs but not Social Security and Medicare. The Senate passed such a budget once. But Obama would not sign such reforms. Ryan showed a better approach than the fiscal insanity today. He also showed that such a budget could be passed in the House multiple times and that Republicans could keep control of the House and Senate. Such reforms to mandatory programs focused on means-tested programs—not the ones people believe they have paid for (Social Security and Medicare)–without political backlash. More recently, in 2017, Republicans passed a related Medicaid reform through the House and came within Senator John McCain’s one-nay vote to pass such a reform that Trump had agreed to sign. Even a narrow majority of Republicans in the House and Senate with a Republican president could enact significant reform. This could include block-granting welfare programs to the states and removing federal mandates so states could experiment with different ways to keep costs down, which is paramount in our system of federalism. At the state level, several states are moving their government pensions from the traditional union-style defined-benefit system that runs up unfunded liabilities to defined-contribution plans—40lK-style—that do not create unfunded liabilities. As they grow in number and size–and in the private sector, most pensions are already 401K-style defined-contribution plans–the willingness of Americans to shift Social Security and Medicare to similar structures will grow. The idea first floated by Bush, Jr. remained popular with younger voters even as the Democrats refused to consider the reform in the 2000s. Chile shifted its social security system to an opt-in program like an IRA. Ninety percent chose to leave the traditional program, and the government option was eventually phased out. Since then, more than 30 other countries have privatized or partially privatized their retirement programs. Britain has a hybrid system similar to some U.S. state pensions. Over time, the unfunded liabilities reduce to zero under this approach, and total spending bends down the cost curve. Simply beginning the block granting of means-tested programs and later starting the longer phase-in to fully funded, individually controlled 401 K-style Social Security and Medicare would clarify that the U.S. was headed toward fiscal sustainability by reducing pressure on the budget and the economy. Economic Growth: The Key to Prosperity A robust economy is the bedrock of a sustainable fiscal future. By implementing pro-growth policies, we can bolster economic stability and create an environment that fosters job creation and wealth generation, ensuring a prosperous future for all. The Impact of Tax Policy on Growth We had strong economic growth after the Reagan tax cuts. This broad-based tax cut reduced the top individual tax rate from 70% to 50% in 1981 and then to 28% in 1986, which lasted until Bush, Sr. raised taxes. The capital gains tax reduction in 1978, 1981, 1997, and 2001 contributed to higher economic growth rates. More recently, the Trump tax cuts of 2017 cut the corporate income tax rate from 35%, the highest in the developed world, to 21%, making it near the European average. Over time, the entire Trump tax cuts and deregulation contributed to an inflation-adjusted median household income increase of 8.5% from 2017 to 2019. Lower individual tax rates and capital gains taxes (Coolidge, JFK, Reagan, Bush, Jr., and Trump) and the corporate tax rate in 2017 contributed to faster economic growth rates in the past and will again. Less spending and more economic growth are good ideas but are now required by the growing debt from years of uncontrolled spending and underperforming economic growth. The Role of Pro-Growth Policies in Reducing the Deficit To achieve long-term fiscal sustainability, it is essential to implement pro-growth policies that stimulate economic activity and increase government revenues without raising tax rates. Lowering taxes can increase incentives to work and invest, supporting higher economic growth and increasing tax revenues. This is the "Laffer Curve" effect, where reducing tax rates can sometimes increase total tax revenue by boosting economic activity. Regulatory relief can lower the cost of compliance for businesses, encouraging them to invest and expand. This increased investment increases productivity, job creation, and economic growth. By making the Trump tax cuts permanent, finding other tax reforms and relief to support more growth, and reducing regulations that inhibit economic growth, there is ample opportunity to support faster economic growth and increased tax revenues. The CBO expects total outlays to be $6.4 trillion in FY 2024, $6.8 trillion in FY 2025, and $10.1 trillion in FY 2034. This is not sustainable because total revenue is expected to be $4.9 trillion in FY 2024, $5.0 trillion in FY 2025, and $7.5 trillion in FY 2034. Figure 1 shows this under these caps, which would function like a strict fiscal rule for the entire budget and projected total revenue if there was a sustained 1-percentage point higher real GDP over the decade due to more pro-growth economic policy. The spending caps are explained further below. Table 1 shows the results of the CBO’s projection of the total for mandatory outlays and our estimates for each growth cap scenario for the upcoming 10-year window. Faster economic growth could come with such tax reforms as a simplified, broad-based, flat-income tax system. Based on the data from the President’s latest budget estimates (see Table 2-4) of a sustained one percentage point higher real GDP over the 10-year window, there could be nearly $3.5 trillion more in tax revenue. The result would be that the federal government would nearly balance in 2031 with a 1% growth limit on spending or by nearly 2034 with a spending limit of inflation. A spending limit of the rate of population growth plus inflation would still run a deficit after a decade but would balance shortly after that. Total Deficit These sustainable budget approaches work well to support more economic growth and reduce spending growth over time. However, these will likely create tough political challenges, though they should be considered rather than raising taxes. Of course, these budget improvements would be even more significant if there were pro-growth policies of less spending, lower taxes, reduced regulation, expanded free trade, and other efforts that limit government intervention in our lives and livelihoods. Given the above calculations, we can evaluate, based on our approaches, what could happen to the deficit over time. Figure 2 shows what this looks like under these caps. Table 2 shows the results of the CBO’s projection of the total for the total deficit and our estimates for each growth cap scenario for the upcoming 10-year window. Overall, the only approach to a balanced budget by 2034 is the 1% growth cap, but faster economic growth would help the other two spending restraint approaches reach a balanced budget in about a decade. All three spending restraint approaches would improve the budget picture substantially compared with the CBO’s baseline budget. Also, we have kept the CBO’s projections for tax revenues or used the President’s latest estimates with faster economic growth, so our approach is very conservative. The results would most likely be substantially higher tax revenues by limiting government spending in the productive private sector and not hurting economic activity by raising taxes, as noted above, but rather providing pro-growth tax reform. Fiscal Reform Initiatives and Their Outcomes Various fiscal reform initiatives have been proposed and implemented over the years, with varying degrees of success. The most effective have combined spending restraint with pro-growth economic policies. Sustainable Budgeting Practices Adopting sustainable budgeting practices involves setting strict limits on spending growth and focusing on essential services. This approach helps to stabilize debt levels and create a more predictable fiscal environment. The federal government's enactment of a sustainable budget would assist these reforms. This would be a fiscal rule of spending limit similar to the Swiss debt brake or Colorado’s TABOR, whereby federal spending would be capped at no more than the rate of population growth plus inflation. Of course, federal spending should be much lower than this rate to correct for past excesses and bloated national debt. However, the spending limit will force Congress to reform mandatory programs and reduce the national debt. Had this spending limit been in place from 2004 to 2023, the federal debt would have increased by $700 billion instead of the actual increase of $20.2 trillion (Figure 3). A cornerstone of our approach is establishing a strict federal spending limit, block-granting federal safety net programs, and mandating work requirements for recipients to receive taxpayer funds. This approach underscored the need for disciplined fiscal policy to curb the government's excessive spending tendency. By setting a clear ceiling on expenditures, our proposal sought to ensure that federal spending grows at a rate that does not exceed the taxpayers’ ability to fund it, thereby addressing the root cause of the burgeoning national debt. The key pillars of our project are block grants and work requirements for safety net programs tied with spending restraint and other pro-growth policies. Block Grants and Work Requirements One successful reform has been the implementation of block grants for welfare programs, coupled with work requirements. This approach was central to the welfare reform of the 1990s, which led to significant decreases in welfare dependency and poverty rates. Medicaid, a significant component of the federal safety net, has been a focal point of fiscal scrutiny due to its rapidly expanding costs. As a joint federal-state program, Medicaid's current open-ended funding structure incentivizes higher spending, contributing to its unsustainable trajectory. We propose a transformative reform of Medicaid by transitioning it to a block grant program. This approach would allocate fixed amounts of funding to states, granting them greater autonomy over the administration of Medicaid. This decentralization is intended to spur innovation and efficiency as states tailor the program better to fit the needs and circumstances of their populations. Crucially, this block grant proposal includes stringent limitations on funding growth. These limitations ensure that Medicaid spending does not outpace the broader economy or the government's fiscal capacity. By imposing these constraints, the plan aims to make Medicaid more sustainable long-term, aligning its growth with realistic fiscal parameters and reinforcing the broader goal of government restraint. Advancing Fiscal Responsibility: The Broader Implications While Medicaid reform was a critical aspect of Ryan's fiscal strategy, it should be extended to a comprehensive overhaul of mandatory programs. By advocating for reforms that introduce more market forces and personal responsibility into programs like Medicare and Social Security, we could address the unsustainability of mandatory spending. These reforms are grounded in the principle that fiscal responsibility necessitates hard choices and innovative solutions to preserve the social safety net for future generations. At the heart of our proposal is a call for limited government. This means reducing the size and scope of federal programs and emphasizing the importance of unleashing the private sector's potential. By advocating for tax and regulatory reforms that encourage investment and job creation, our proposal reflects a belief in the power of economic freedom to drive prosperity. Results from the Let Americans Prosper Project Many areas of the federal budget need to be reformed or eliminated, as many are questionable under the Constitution. But without eliminating those areas right away, unless there is political will, the Sustainable American Budget approach block grants many of the programs that currently go to states and cap the growth rate of those to different rates. These growth rate caps include 1%, inflation rate, or the rate of population growth plus inflation. The inflation measure used is the chained-consumer price index, which accounts for substitution effects and has been the index used to adjust federal income tax brackets since the Trump tax cuts. Our analysis uses the average growth rates from the last decade of 2.59% for chained CPI and 3.12% for population growth plus inflation. We consider different areas of the budget for the latest CBO projections for tax revenues and spending from 2025 to 2034. These projections from the CBO need to be more precise as they do not account for unforeseen recessions or other complications. Our projections do not account for the likelihood of faster economic growth from our pro-growth policy changes. Regardless, our projections provide helpful estimates when considering the best path forward to deal with the fiscal and economic crisis. Table 3 provides the CBO’s 10-year window estimates for the federal budget. These data indicate that mandatory spending on things like Medicare and Social Security will account for 61.7% of the total outlays over the next decade, with discretionary spending comprising 23.2% and net interest of 15.0%. This provides further evidence that something must be done about mandatory programs before there is fiscal relief. Given this unsustainable trajectory, we consider the following scenarios for specific areas of the budget and others for comparison to help right the ship that is ready to crash if it has not already. Medicaid Spending We start by block-granting Medicaid expenditures to states. Medicaid has many problems, as recently outlined by the American Legislative Exchange Council, and those states that haven’t expanded Medicaid should not. In short, coverage doesn’t equal care, especially when it is covered by the government and paid for by taxpayers. Regardless, we consider what Medicaid could spend over the next decade if it was block-granted to states and then limited to the growth rate caps noted above. Figure 4 shows what this looks like under these caps. Table 4 shows the results of CBO’s projection of Medicaid spending and our estimates for each growth cap scenario for the upcoming 10-year window from 2025 to 2034. Medicaid and Income Security Programs Spending Expanding the block grant approach beyond Medicaid, we should include income security programs such as the Supplemental Nutrition Assistance Program (SNAP), earned income, child and other tax credits, supplemental security income, unemployment compensation, child nutrition, and family support, including housing vouchers and foster care. Consolidating these programs into block grants to states can significantly improve efficiency and accountability. States, being closer to the needs of their populations, are better positioned to administer these programs effectively, ensuring that aid reaches those who need it most while minimizing waste and fraud. Figure 5 shows what this looks like under these caps. Table 5 shows the results of the CBO’s projection of the total for Medicaid and income security program spending and our estimates for each growth cap scenario for the upcoming 10-year window. Because the CBO projects that spending on income security programs will decline in 2026 and 2027 and then increase again, its average growth rate is 1.1%. Hence, the primary savings from our approach is on Medicaid spending. Discretionary Spending Capping Medicaid and other safety net programs will help provide some fiscal relief but not much over time. We also consider our approach with discretionary spending, which is expected to be $1.7 trillion or about 27% of $6.4 trillion in total outlays in FY 2024. Figure 6 shows what this looks like under these caps. Table 6 shows the results of the CBO’s projection of the total for discretionary outlays and our estimates for each growth cap scenario for the upcoming 10-year window. The only scenario that reduces discretionary outlays compared with the CBO’s baseline is the 1% growth approach. Of course, this is less than 30% of total outlays, so major cuts would be needed to improve the unsustainable fiscal trajectory. Mandatory Spending Capping discretionary spending alone will not solve the long-term fiscal problem. While we understand this will be politically challenging, evaluating what else must be done to provide a sustainable fiscal path is important. We consider our approach for mandatory outlays, which includes Social Security, Medicare, and other programs. The CBO expects mandatory outlays to be $3.8 trillion, or about 73% of $6.4 trillion in total outlays in FY 2024. Figure 7 shows what this looks like under these caps. Table 7 shows the results of the CBO’s projection of the total for mandatory outlays and our estimates for each growth cap scenario for the upcoming 10-year window. These sustainable budget approaches work well to reduce the long-term cost of mandatory outlays. However, these will likely create tough political challenges, though they should be considered rather than raising taxes. Social Security Regarding mandatory outlays, we consider our approach specifically for Social Security and Medicare. Figure 6 shows what spending on Social Security looks like under these caps. Table 8 shows the results of the CBO’s projection of the total for Social Security and our estimates for each growth cap scenario for the upcoming 10-year window. Medicare Regarding mandatory outlays, we consider our approach specifically for Social Security and Medicare. Figure 9 shows what spending on Social Security looks like under these caps. Table 9 shows the results of the CBO’s projection of Medicare's total and our estimates for each growth cap scenario for the upcoming 10-year window. Conclusion: Envisioning a Sustainable Fiscal Future The Let Americans Prosper Project provides a fiscal reform approach that boldly attempts to steer the U.S. from its unsustainable fiscal path. Government restraint, including a strict spending limit and targeted reforms like block-granting Medicaid and other safety net programs to states with work requirements, can provide a strong framework for achieving long-term fiscal sustainability. While requiring significant political will and public support, these measures underscore the imperative of disciplined fiscal management and the value of economic freedom in securing America's financial future with a sustainable budget. Vance Ginn, Ph.D., is president of Ginn Economic Consulting, host of the Let People Prosper Show, affiliated with more than 15 free-market national and state think tanks, and was previously the associate director for economic policy of the White House's Office of Management and Budget, 2019-20. Follow him on X.com at @VanceGinn. Your browser does not support viewing this document. Click here to download the document.
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Vance Ginn, Ph.D.
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