At $6 trillion, President Joe Biden’s first budget calls for an unprecedented level of federal spending. Republican members of Congress who criticize the president’s plan are understandably reminded by Democrats that the GOP did not do much to resist—and even contributed to—excessive government spending during President Donald Trump’s time in office. During those four years, rampant spending led to nearly $8 trillion in more federal debt, though this included pandemic-related funding approved with bipartisan support. Still, this represents a 40% jump in mortgaging the future of ourselves, our kids, and our grandkids. It’s time for responsible budgeting at every level of government.
Republicans in Washington don’t have much of a leg to stand on when it comes to criticizing the profligacy of congressional Democrats and the Biden administration. But Republicans in many state capitals across the country, however, do. That’s because Republican governors and lawmakers in several states are getting government spending under control by passing conservative budgets which remain below population growth plus inflation. North Carolina is among the most prominent examples of this phenomenon—but is not the only one.
Since Republicans took control of the North Carolina General Assembly for the first time in a century a decade ago, they have kept growth in state spending on a conservative budget trajectory that keeps government growth within the average taxpayer’s ability to fund it. Since 2013, North Carolina state spending has grown by an average of 2.24% annually, which is below the population growth plus inflation rate of 2.58%.
By keeping the rise in state spending below a conservative budget limit for so many years, North Carolina lawmakers have been able to return billions of dollars to taxpayers over the past decade while realizing repeated budget surpluses. The income tax rate reduction approved nearly a decade ago continues to pay dividends for taxpayers and it may soon be improved upon. North Carolina lawmakers — led by Republican Senators Paul Newton, Bill Rabon, and Warren Daniel — proposed new legislation in April, which was approved with bipartisan support in the North Carolina Senate on June 9, that would enact the next round of income tax rate reduction.
“We have large cash reserves and we have yet another budget surplus for the sixth and seventh years,” Senator Paul Newton, Finance Committee Co-Chairman, said at a May 25 press conference. “The Republican philosophy, when government takes too much money from the people, is to give it back in the form of tax relief. In our view, it’s never, never the government’s money, it’s the people’s money. So we are proposing yet another tax cut because we believe people spend their money better than government does.”
By continuing to pass conservative budgets, North Carolina lawmakers have made the Tar Heel State one where lawmakers are leading by example, demonstrating for federal lawmakers that government spending restraint is both achievable and politically advantageous. Other states where lawmakers are also passing conservative budgets include Tennessee, Texas, Florida, Montana, and Iowa.
In neighboring Tennessee, lawmakers needed to make sure their new budget, enacted earlier this spring, stayed below $42.8 billion so as to pass a conservative budget. The new state budget signed into law by Governor Bill Lee (R) spends a total of $42.6 billion. By only increasing the state budget by 2.08% year over year, Tennessee lawmakers, like their counterparts in North Carolina and other states, have made sure that state spending does not exceed the average taxpayer’s ability to pay for it, thereby mitigating the threat of future tax increases or budget adjustments.
Tennessee isn’t the only no-income-tax state where lawmakers are doing of good job of keeping government spending in check. Texas is also leading by example. Not only have Texas lawmakers once again approved a new conservative budget, they used the 2021 session to approve legislation, Senate Bill 1336, that will strengthen the state’s spending cap, ensuring fiscal responsibility for years to come. Likewise, a constitutional amendment introduced by North Carolina legislators in April, referred to as the Taxpayer Bill of Rights, if enacted, would implement a similar state spending limit in North Carolina.
North Carolina lawmakers are now working to enact a new conservative budget that provides further tax relief. Those who want to continue the sustainable budgeting of recent years received good news in early June as legislative leaders from both chambers of the General Assembly announced a consensus spending figure that, if the new budget does not exceed it, would have state spending continue to grow slower than the combined rate of population growth plus inflation. More recently, the North Carolina Senate unveiled its version of the budget, which, in addition to spending less than the figure agreed to with the House in early June, cuts the personal income tax rate from 5.25% to 3.99% while phasing out the corporate income tax by 2028. That budget was approved with a bipartisan, veto-proof majority in the North Carolina Senate on June 24.
“We are pleased to see that the fiscal restraint the General Assembly has shown over the last ten years will continue,” said Brian Balfour, senior vice president of research at the John Locke Foundation, a Raleigh-based think tank. “It’s a strategy we would like to see added to the state constitution in the Taxpayer Bill of Rights.”
Based on federal spending trends and the new proposals coming out of Congress, it may seem like no one in Washington is interested in reining in the growth of government spending and ballooning federal debt. Yet lawmakers in states across the country, including North Carolina, Tennessee, and Texas, the world’s ninth-largest economy, are showing that government spending can be brought under control. There needs to be more lawmakers willing to do so.
North Carolinians are fortunate to have leadership in the General Assembly with such courage and will, who are showing the nation what conservative budgeting looks like. In doing so, they are benefitting North Carolina taxpayers while providing a model for lawmakers in other states and in Washington to emulate.
Patrick Gleason is vice president of Americans for Tax Reform, a taxpayer advocacy organization founded in 1985 at the request of President Ronald Reagan, and is a senior fellow at the Beacon Center of Tennessee, a Nashville-based think tank. Vance Ginn, Ph.D., is chief economist at the Texas Public Policy Foundation based in Austin, Texas, and he is the former chief economist of the White House’s Office of Management and Budget during the Trump administration.
Peanut butter and jelly. Fred Astaire and Ginger Rogers. Budget limits and budget cuts. Some things just pair perfectly together.
Here at the Texas Public Policy Foundation, I’m sometimes asked why my focus lately has been on budget limits—as seen in our Conservative Texas Budget (the model for which has been adopted by other states) and our Responsible American Budget. Both of these set hard maximum limits for what can be considered as conservative, “no government growth” budgets.
A state or national budget should grow less than the simple formula of population growth plus inflation. Beyond that, budget writers truly are increasing the size and scope of government, which crowds out the average American’s opportunities to prosper.
But why am I not talking more about budget cuts, I’ve been asked. I am! If I had my way, the federal budget would be about a quarter of its size. The actual budget proposal I worked on during my year at the White House (for FY 2021) proposed a record of $4.6 trillion in less national debt over a decade, made most of the Trump tax cuts permanent, and would have balanced the budget over time.
The truth is that budget limits and budget cuts aren’t mutually exclusive—they’re a perfect pairing. Budget limits tell budget writers, “This much, and no further.” Budget cuts are an opportunity for those writers to demonstrate real fiscal conservatism by reducing the size and scope of government.
And over time, budget limits will cut the budget as a share of the nation’s Gross Domestic Product (GDP), because the GDP tends to grow faster than population-plus-inflation.
At the national level, the U.S. budget picture would be much improved if the federal government had spent no more than population-plus-inflation since 2000. Instead of increasing our national debt by $16.2 trillion in that time, we would instead have seen a surplus of $2.6 trillion.
Budget cuts—which could have been achieved by, say, sticking with the welfare reforms enacted in 1996—would make that picture even brighter.
Here’s what we know: Irresponsible government spending damages the productive private sector through redistribution of resources, higher taxes, higher price inflation, and higher interest rates, reducing Americans’ real incomes, job opportunities, and prosperity.
Budget limits and budget cuts are both ways to attack government spending—from different directions. Both are useful; both are needed. Supporting budget limits doesn’t mean supporting more spending; limits and cuts can be embraced at the same time and for the same purpose—to allow more Americans the freedom to prosper.
This table provides a comparison of initial appropriations for the 2020-21 budget from the Legislative Budget Board’s (LBB) Fiscal Size-Up and for the 2022-23 budget as noted in the conference committee report for SB 1 General Appropriations Act. We compare the budget with the Foundation’s Conservative Texas Budget (CTB) limits based on on a 5% increase in population growth plus inflation.
We exclude from the 2020-21 budget the $8.3 billion in mostly federal funds for one-time Hurricane Harvey recovery expenses and the $5 billion in general revenue funds for a 7-cent tax rate compression of school district M&O property taxes in HB 3 from the 2019 session. Likewise, we exclude from the 2022-23 budget the $6.1 billion in general revenue funds to maintain last session’s property tax relief—which without this allocation would result in a 7-cent tax rate hike in those property taxes and likely more spending. And we will exclude one-time distributions of federal funds related to the pandemic. Not including these types of one-time funds is necessary for budget transparency and for not inappropriately inflating the baseline budget allowing excessive appropriations later. We also exclude the $410.2 million in all funds for Article X that Gov. Greg Abbott vetoed, and he will likely include in a special session.
The 2022-23 Texas budget is well below the CTB limits in state funds and all funds, and leaves $11.6 billion in the rainy day fund. Excluding the $6.1 billion to stop a massive property tax hike, general revenue funds decline by 3.1% and state funds are up by only 0.7%. Including it, state funds are about $725 million below the CTB. And all funds, which is the full footprint of the taxpayer’s burden to fund state government appropriations, is up 3% to $242 billion, which compared with population growth plus inflation is 2-percentage points lower and $4.8 billion less.
The growth of initial appropriations, on average, has now been well below the average taxpayer’s ability to pay for them over the last four budgets, which was directly after the Foundation created the CTB in 2015.
The Texas Legislature’s practice of fiscal restraint while meeting the needs of the state is good news for Texans. And much of the CTB was passed into statute as the Legislature strengthened the state’s spending limit by expanding the base to all general revenue funds and changed the growth limit to population growth times inflation while increasing the threshold to exceed it to a three-fifths majority in each chamber. After the Foundation has worked toward this statutory change for multiple sessions, this is a huge feat that will have long-lasting benefits to Texans.
We encourage Gov. Greg Abbott to build on these policy wins and more by providing paths for more fiscal gains—such as substantial property tax reductions and improved local revenue limitations—in a special session.
Full article with figures.
Price inflation in May 2021 was up 5% over May of 2020. At this pace, the general level of prices will double in less than 15 years. The last time inflation was running this high was in 2008, when gasoline first breached $4 a gallon. And inflation expectations for the next year have reached a record high.
But what did we expect when the government created trillions of dollars and forced people to stay home from work? The Federal Reserve’s balance sheet has exploded by 100% to more than $8 trillion since last year; it was the perfect recipe for inflation with more money supplied than goods and services available to buy.
There have been red flags for months, with businesses announcing that they are raising prices.
Proctor & Gamble manufactures hundreds of products across dozens of brands from diapers to detergents. General Mills makes various foodstuffs from cereals to soups and pastries to pizzas. Hormel also sells various food products. Whirlpool manufactures appliances. Texas’s own Kimberly-Clark makes tissues and paper towels, among other products. Tempur Sealy sells bedding.
Americans use or consume products from these businesses every day, and those companies are all raising their prices, which hurts consumers’ purchasing power. Grocery stores and restaurants across the country have been raising prices as well.
But why these sudden price increases? Businesses are facing higher costs. Commodity prices are climbing quickly, as are wages due to labor shortages.
The contention that current inflation numbers are skewed because of “base-effects” from the early months of the pandemic is incomplete. The consumer price index (CPI) in May 2020 (the lowest point of pandemic-era prices) was just 1% below the CPI’s then-record high in February 2020, which has been eclipsed since August 2020. So, the base-effects argument does not explain a 5% annual increase.
Inflation is a tax, pure and simple, but not an explicit tax. Instead, it robs you of your purchasing power subtly and silently so that most people are none the wiser. It is not accomplished expressly through legislation, but through the sophisticated maneuvers of the Fed, giving inflation an air of mystery.
In reality, there is nothing mysterious about inflation. When the Fed creates money faster than the economy grows, then prices will tend to rise. That is why there is also no end in sight to this inflationary wave. The Fed continues to target historically low interest rates by creating money every month at an annual pace of more than $1.4 trillion, far faster than the economy is growing. The result is real wealth being taken from you—taxation without representation.
Nevertheless, it is surprisingly easy to stop inflation.
Ending inflation only requires the Fed to cease flooding the economy with money. If the Fed slows its money creation, though, then Congress cannot use inflation to finance the nation’s deficits, which seems to be Congress’s favorite way to spend.
Conversely, if Congress were to achieve a balanced budget through sound fiscal policy, then the Fed could return to its original mission of price stability, and not worry about backstopping massive federal deficits with newly created money.
This could be more quickly be achieved by implementing the Texas Public Policy Foundation’s Responsible American Budget, which sets a total budget limit at no more than the average taxpayer’s ability to pay for it as measured by population growth plus inflation. While this would not completely solve the problem of inflation, a journey of a thousand miles begins with a single step, and this will point the country in the right direction.
We must not let the best be the enemy of the good; something must be done sooner rather than later to stop the current runaway spending in Congress.
For example: Senators in Congress have recently reached a tentative bipartisan “infrastructure” deal to spend another $579 billion without raising taxes—or more accurately, without explicitly raising taxes. The spending will be financed with bonds purchased by the Fed, which means through the implicit tax of inflation. That $579 billion will still be collected, but not through so obvious a mechanism as the IRS.
No, inflation is too subtle, silent, and sophisticated for that.
Sound fiscal policy must begin with spending restraint. Gov. Kim Reynolds and the Republican-led Iowa Legislature continued to follow pro-growth fiscal conservatism during the most recently concluded session.
The Legislature passed an $8.1 billion FY 2022 state budget, which provided an estimated $1 billion in tax relief to taxpayers instead of growing government. This brings the budget well under the average taxpayer’s ability to pay for it, as measured by the Tax Education Foundation’s Conservative Iowa Budget, which sets a maximum threshold based on population growth plus inflation.
This budget is $290.7 million more than the FY 2021 budget. The $8.1 billion budget is over $4 million more than what Reynolds initially proposed. Nevertheless, Iowa’s fiscal house is in good standing.
The budget spends 97.66% of projected revenues for FY 2022, leaving a projected $385.8 million surplus. There is plenty of money available for a rainy day, including a combined $817.9 million in the Cash Reserve Fund and the Economic Emergency Fund and $316.4 million in the Taxpayer Relief Fund.
Reynolds and conservatives are criticized by many progressives and liberals who argue that areas of the state budget are underfunded, especially public education and health care (DHS), which includes Medicaid. However, this does not mean that spending has declined.
From 2013 to 2020, Iowa’s budget has grown 1.6 times faster than population growth plus inflation. Last year’s budget (FY 2021), which passed during the pandemic, was considered a “status quo” budget, with spending only slightly higher than the previous year. This is hardly austerity-style budgeting and only in government can slowing the growth of spending be considered a “cut.”
Public education (pre-k-12, community colleges and higher education) and health care consume 79.9% of the budget. In FY 1995, both were just 47.2% of total spending, so their share of spending is up nearly 70% since then. State aid to schools continues to be the largest appropriation at $3.4 billion, and added with funding to other payments to public education, is 54% of the budget. The health care budget is more than $2 billion.
The growing cost of both public education and health care should concern policymakers. The rapid increase in spending on these programs is on autopilot and is crowding out other budget priorities along with the private sector through higher taxes. Structural reforms to these programs are needed.
Spending restraint is the cornerstone for sound fiscal policy, and thereby helps keep taxes in check. A priority for the governor was making Iowa’s tax code and economy more competitive, while the Legislature provided much needed tax relief.
In part, this tax reform repealed the state’s stringent income tax triggers, which will allow the top rate to fall to 6.5% in 2023. This will provide greater tax certainty and create an opportunity for future tax rate reductions. Also, Iowa’s obsolete inheritance tax will be phased-out over a five-year period. The county mental health property tax levy will be phased out, as well.
As a result of prudent spending, the Iowa Legislature can consider further tax reform during the next legislative session. Tax reform in Iowa is far from complete and both individual and corporate tax rates need to be lowered and ultimately eliminated.
If policymakers want to seriously reduce tax rates, allowing for more money to stay with families, and make the tax code more competitive with other states, spending must be prioritized and limited.
Spending discipline is vital, and the Iowa Code limits spending to 99% of projected revenues. Strengthening the spending limitation by placing it in the state Constitution and limiting spending to population growth plus inflation, as outlined in the Conservative Iowa Budget, would better match the average taxpayer’s ability to pay for it every session.
The actions by Gov. Reynolds and the Iowa Legislature offer a clear contrast to President Joe Biden (and Democrats in Washington), who in his first 100 days in office has passed or proposed $6 trillion in new spending.
Fortunately, Iowa provides an example of responsible budgeting to federal policymakers and state legislators to provide more opportunity for people to flourish.
Texans will benefit from the policy wins achieved in the 87th Texas Legislature. Among other things, lawmakers:
Passed a Conservative Texas Budget
Strengthened spending limits
Maintained property tax relief
Improved taxpayer protections
Reduced regulatory barriers
The Texas budget, SB 1, came in below the Conservative Texas Budget—in fact, it is about $5 billion below the ceiling the Texas Public Policy Foundation set after excluding the $6.1 billion to maintain the property tax relief from last session. Great credit is due for Senator Jane Nelson and Representative Greg Bonnen because Texans simply cannot afford to pay for out-of-control spending.
Fortunately, measures to address future spending were addressed, too. SB 1336 by Senator Kelly Hancock was sent to the Governor’s desk. This makes much of the Conservative Texas Budget statute by limiting lawmakers from increasing the budget by more than population growth and inflation.
Following the 2019 Session, many local governments sought to bypass the 3.5% limit on property tax growth by taking on more debt in the form of certificates of obligation. This debt would then be passed on to taxpayers. HB 1869 by Representative Dustin Burrows clarifies the definition of debt and reduces this practice for taxing entities.
Local governments also sought to use the “disaster” loophole in 2020 to raise property taxes by 8%. Senator Paul Bettencourt filed SB 1427 which clarifies the types of disasters that can be used to bypass the 3.5% property tax rate limit—COVID-19 was NOT one of the disasters.
Additional bills that expanded on property tax reforms from the 2019 Session were SB 1438 and SB 1449 by Senator Paul Bettencourt. The first would clarify tax rate adjustments and the second would raise the income threshold from personal property from $500 to $2,500 which cuts taxes for small businesses.
On the regulatory side, there were several wins like HB 1560 by Representative Craig Goldman which cuts back on occupational licenses and cuts regulations. HB 139 by Representative Brad Buckley provides license reciprocity for military members, veterans, and their spouses so they will not be forced to go through a new licensing process for an occupation when they move to Texas from another state. Finally, there was SB 424 by Senator Juan “Chuy” Hinojosa which reduces regulatory penalties against small businesses for first time violations.
President Biden finally released his FY22 budget proposal on a Friday afternoon before a long Memorial Day weekend. This was good timing for the White House because it helps hide how irresponsible his budget is for America. But Americans know better, and his budget should be rejected and replaced with one that follows a responsible, pro-growth path forward.
During my year as the chief economist of the White House’s OMB during the Trump administration, I helped determine the economic assumptions and other key decisions in the President’s last FY21 budget. We advocated for a path toward more free market capitalism-supporting robust economic assumptions.
This policy forecast included faster economic growth resulting from making almost all of the Trump tax cuts permanent, further deregulations, and fiscal restraint of nearly $5 trillion in savings over a decade to balance the budget and to support opportunities for Americans. The path built on what was already working—an agenda that helped America reach a record low poverty rate and a record high in real median household income in 2019.
As someone who has worked at a think tank in Austin, Texas for years, I’ve seen the gains made by the Texas Model—no personal income tax and relatively lower government spending, taxing, and regulations, which contributes to more economic freedom, lower cost-of-living, and greater human flourishing compared to most states. Alternatively, California has taken a different approach—with now the second-highest personal income tax rate, stricter regulations, and substantially more spending that crowds out economic activity and destroys prosperity.
Given our system of federalism that was designed to produce a laboratory of competition among states, we can clearly see that the Texas Model works well over time, compared to states like California.
The Trump administration learned from the more fiscally responsible states, and used the Texas approach when it came to criminal justice reform, deregulation, lower taxes and proposed spending restraint, which resulted in substantial, tangible economic gains. Unfortunately, the Biden administration is following the folly of the big-government California model—which demonstrably doesn’t work.
There are at least three ways that President Biden’s first budget is irresponsible. First, Biden’s $6 trillion budget sends us down the road toward socialism.
The increase in the budget from the pre-pandemic baseline FY20 budget of $4.81 trillion shows that Biden’s budget is 25% higher. If Biden’s budget was limited to the average taxpayer’s ability to pay for it, as measured by population growth plus inflation of 1.37% in the Foundation’s Responsible American Budget, then taxpayers would foot the bill for a maximum of $4.88 trillion. The president’s budget is $1 trillion, or 23%, more than this metric, meaning that his budget proposal takes ownership of more means of production throughout economy and livelihoods (which is the definition of socialism).
The excess spending continues over time as the budget expands by $69 trillion over a decade, increasing the national debt by 50% or by $14.5 trillion, and results in the debt owed by each American rising by 50%, to about $120,000. The American Jobs Plan would add $529 billion and the American Families Plan adds $270 billion. These expansions of government are really anti-jobs, anti-families, and anti-American, as this is a road without a good destination.
Second, the Biden budget makes flawed economic assumptions.
As someone who helped determine the economic assumptions in President Trump’s final budget, I understand how there are many variables underlying the president’s budget. It’s not an exact science, but it’s important to do your due diligence.
An unlikely economic assumption in Biden’s budget is that real gross domestic product keeps increasing over time, despite the substantial tax hikes of more than $3 trillion. Additionally, the administration is acknowledging its proposals are more about socially engineering society to its preferred outcomes rather than achieving more economic prosperity. Economic growth in his budget is just 3.2% in 2022 and just 2% in 2023 after rampant government spending, with less growth thereafter. These growth rates are substantially less than the post-WWII average of 3% and lower than the three pre-pandemic Trump years. In short, the economic assumptions are weak even given a Keynesian view that government spending drives more growth, which I don’t share.
And even those growth rates are optimistic as higher taxes slow growth, just as substantially higher debt from the excessive spending does. Higher debt means either interest rates will have to rise as more debt is issued or the Federal Reserve will have to continue monetizing it and bring about inflation, which also contributes to higher interest rates.
Currently, inflation is about 4% (at an annualized rate), and will likely stay that high. It could even increase with the large increases in the money supply and the continued purchases by the Fed of $120 billion in Treasury securities monthly. Again, Biden’s budget fails again as it assumes inflation is only 1.8% in 2021 and plateaus at 2.3% starting in 2025, which is unlikely given the situation.
Meanwhile, the 10-year Treasury note rate is about 1.6%, but the proposed budget has it at only 1.2% for this year and rising to only 2.8% by 2031. With $14.5 trillion added to the debt (including net interest rising from $345 billion to $883 billion in 2031) and the probable higher inflation that will need to be subdued with less money creation and resulting higher interest rates, we could see much higher interest rates than what his budget assumes. This would result in even less economic growth than what’s in Biden’s budget, thereby increasing the number on welfare programs, which will itself drive up government spending. This will also influence other budget items.
Assuming lower interest rates in the Trump budget made more sense, given we were putting the budget on a path toward balancing over time. But the Biden budget maintains deficits of more than $1.3 trillion every year, with the deficit-to-GDP ratio only going down to 4.2% in 2029, which is well above the historical rate of 3%.
This brings us to the third way that Biden’s budget is irresponsible: It mortgages ours and our kids’ and grandkids’ futures.
Irresponsible government spending causing massive deficits along with rising net interest over time will cost us more and reduce opportunities for good-paying jobs, affordable credit, and a lower cost-of-living. It will also raise interest rates, resulting in lower real incomes and fewer job opportunities.
Fortunately, we know that the pre-pandemic policy approach taken by President Trump supported record levels of human flourishing. Congress should have done a better job of reining in government spending, and the administration could have touted spending restraint more. But even then, the growth in spending wasn’t at the level proposed by Biden. If Congress had controlled its spending, then the deficit, interest rates, inflation, and trade deficits would likely have been lower. Those goals are still worth pursuing.
That’s why TPPF created the Responsible American Budget, which is supported by many policymakers, economists, and thought leaders. It sets a maximum threshold for the federal budget every year based on the average taxpayer’s ability to pay for it (based on population growth plus inflation). This is supported by research on fiscal rules that have worked well in other countries and states, including Texas, Montana, Iowa, and Alaska.
By rejecting President Biden’s irresponsible budget proposal and instead incorporating the RAB in the budget process, Congress could enact a budget that meets the needs of the country without excessively burdening American families. The budget is already far too big; its size and scope are well above what our Founding Fathers imagined, which is why fat should be cut and the budget growth should be limited to the RAB, which will leave more money with families and allow entrepreneurs to build on the success of free-market capitalism.
Join us in ending the days of fiscal insanity in D.C. and replacing it with fiscal responsibility.
The very popular narrative is that Republicans only care about budget deficits and the spiraling national debt when Democrats are in charge. Writing in the Washington Post’s “The Fix” column, J.M. Rieger says that “Republican mea culpas on the national debt follow years of demands for spending cuts to reduce the debt.”
But I was there in the Trump White House, in the Office of Management and Budget. The truth is that the President’s FY 2021 federal budget proposed a record of $4.6 trillion in less national debt over a decade, made most of the Trump tax cuts permanent, and would have balanced the budget over time.
In my work since then at the Texas Public Policy Foundation, we have helped other states move toward our model of a Conservative Texas Budget, and now—working with the Republican Study Committee and many others—we’re doing the same for the gargantuan federal budget. The proposed path to bring fiscal sanity back to Washington, D.C. is the Responsible American Budget.
Here’s what we know: Irresponsible government spending damages the productive private sector through redistribution of resources, higher taxes, higher price inflation, and higher interest rates, reducing Americans’ real incomes, job opportunities, and prosperity.
At the state level, Texas has addressed this with the Conservative Texas Budget. Its main premise is that government shouldn’t grow any faster than the average taxpayer’s ability to pay for it. To provide a bright line marking the limit, we use a proven, simple formula: population growth plus inflation.
This simple formula provides a view of the budget from the taxpayers’ perspective, which is essential given the government has no money but rather collects taxes from us to fund limited roles given to the federal government.
By combining the fact that Texas has an increase of about 1,000 new Texans per day and Texans’ wages are correlated with price inflation, more people and higher wages can support more government provisions, as necessary. This doesn’t mean that government must grow by this simple formula but rather this is the maximum growth each year to avoid further burdening Texans.
As Milton Friedman noted, “the true burden of government is not how much it taxes, but by how much it spends.” Any growth in government spending that exceeds our simple formula represents the kind of growth that means a heavier burden on taxpayers.
That kind of expansion is bad for working families, who pay a larger portion of their income in state and local taxes. In Texas, we have successfully kept the state’s budget below the CTB limits, on average, for the last three legislative sessions, and look to do so again during the current session.
While there have been several attempts to reduce the excessive growth of federal spending in the U.S., these attempts have had limited success, if any, as indicated by the $28 trillion—and quickly rising—national debt and its $350 billion—and skyrocketing—interest payments.
And despite the attempts by the Trump administration to rein in excessive government spending, Congress wasn’t interested and ran up massive spending that led to annual deficits. And then any movement toward reducing it was negated by the COVID-19 pandemic and ensuing fiscal profligacy. It led to appropriations outside of the normal federal budget process of at least $6 trillion over a decade during the Trump and Biden administrations. While some of these appropriations may have been necessary, it clearly made the fiscal path substantially worse.
In addition, the Biden administration has proposed the American Jobs Plan and the American Families Plan that would increase spending by more than $4 trillion over a decade, bringing this administration’s passed or proposed spending to $6 trillion in just the first 100 days.
Clearly, it’s time for fiscal sanity.
Based on the fiscal problems facing the U.S., the federal government needs an annual budget benchmark. We offer such a benchmark in the form of the Responsible American Budget (RAB). The RAB provides a maximum threshold to freeze real (inflation-adjusted) per capita spending, which is simply a limit based on population growth plus inflation.
What would this look like? According to our calculations, a RAB for fiscal year 2022 would be no higher than $4.88 trillion, representing a 1.37% increase over FY 2021, excluding the extraordinary pandemic-related expenditures to not inappropriately inflate the baseline budget to allow for excessive spending later.
The costly effects of these fiscal and subsequent monetary policy excesses challenge Americans’ opportunities to improve their communities’ as well as their future by owning a business, having the dignity of work, saving for a rainy day, and donating to institutions throughout civil society.
The RAB’s spending restraint and its fiscal benefits would allow for a more inclusive institutional framework that supports more freedom for people to choose their destiny and more opportunities to flourish.
Irresponsible government spending damages the productive private sector through redistribution of resources, higher taxes, higher price inflation, and higher interest rates, reducing Americans’ real incomes, job opportunities, and prosperity.
While there have been multiple attempts to reduce the excessive growth of federal spending in the U.S., these attempts have had limited success, if any, as noted by the $28 trillion—and quickly rising—national debt and its $350 billion—and skyrocketing—interest payments.
There is debate about whether deficits matter, and these days many from across the political spectrum suggest that they do not; they are partially correct. The part of fiscal policy that matters to our daily lives is government spending, which is the fundamental source of higher taxes, more regulations, higher debt, and more crowding out of the productive private sector.
Given these challenges, the time is now to address excessive government spending, and we need to promote sound fiscal rules that make the budget tangible for Americans to understand and to hold elected officials accountable for excessive spending. A bold way to do this is provided by the Foundation’s Responsible American Budget.
Read paper here.
The economic policies of the Biden administration—Bidenomics—is conspicuously marked by lofty rhetoric, grand promises, and the best of intentions. It espouses helping the poorest among us, along with amorphous but attractive values like “fairness.” But the results of these policies do not live up to their intentions. Here are just a few examples.
The American Relief Plan does not provide relief for Americans. Instead, it threatens states’ sovereignty and prevents Americans from receiving tax relief.
The American Jobs Plan does not create jobs, but green-energy flimflams. It stifles real job creation through perverse incentives and burdensome regulations. The expansion of unemployment payments is contributing to 6 million fewer jobs, because many people are making more on unemployment than they did while working.
The American Family Plan does not strengthen families, but government dependency. It weakens families by making people reliant on federal programs instead of each other. It also provides health care subsidies without accounting for income, meaning that the very wealthy can receive taxpayer-subsidized health insurance.
The idea of fairness has taken a conspicuous role in the current administration’s agenda, yet its proposed tax changes will result in lower wages, fewer jobs, and less savings, burdens which will fall disproportionately on low-income households.
Inside this Trojan Horse of fairness, Bidenomics seeks higher marginal tax rates on wages, dividends, and corporate income, along with higher death taxes, taxes on unrealized capital gains, taxes on retirement savings, and more.
Infrastructure is a key pillar of Bidenomics, but not the infrastructure you’re probably thinking of. The administration’s proposal allocates only a few percent of its infrastructure dollars to roads, bridges, electrical grids, water and sewer mains, etc. It pours money into green-energy boondoggles, and even seeks to bulldoze highways in perfect condition if they are too close to minority neighborhoods, among other outlandish plans.
To pay for record-breaking spending, Bidenomics relies on funding from the federal reserve, a surefire way to produce inflation. Nothing in this life is free, and we are witnessing those trillions of dollars in government spending fuel rising prices. Inflation is decreasing real wages, particularly among low- and moderate-income households. The very people whom these policies are supposed to help are instead being undermined economically.
If these policies worked only half as well as the names of the bills imply, economic growth would be breaking records, and no one would remain in poverty. Instead, these policies are holding back the recovery like a choke collar, and welfare rolls are swelling. Real private GDP is still about $200 billion below Q4-2019 levels, despite pouring previously unimagined quantities of money into the economy.
We should not be surprised by these results; the policies of Bidenomics—higher marginal tax rates, more government spending and regulation, excessive money creation—have been tried before and found wanting. Nevertheless, many so-called experts continue to push this agenda.
The experts were expecting almost a million jobs in the last jobs report, but we saw only a quarter of that. The experts were expecting 3.6% inflation, but we saw 4.2%. The experts were expecting Keynesianism to revive the economy, but we are seeing the economy sputter. When it comes to Bidenomics, the experts seem to be always wrong but never in doubt.
An activist in economist’s clothing favorably characterized Bidenomics as “heads down, block out the noise, deliver timely help to the American people.” They have their “heads down” alright—like an ostrich with its head in the sand, oblivious to empirical evidence all around. And what is characterized as “noise” is not irrelevant distraction, but the practical feedback that should inform policy decisions. Lastly, the “timely help” is late to the game, with funds allocated in March not actually being spent or sent out to Americans until July.
It is reminiscent of the funding for “shovel-ready jobs” described in the 2009 rescue packages. Even former President Obama admitted that the funds he authorized took years to be spent, arriving far too late to achieve their stated objective.
While some economic policies, good and bad, take years to bear fruit, we are seeing the effects of Bidenomics sooner rather than later. Those effects do not at all match the goals and intentions of the policies, so we must judge according to effects, not the intentions. As the aphorism says, you shall know a tree by its fruit.
To learn more about Bidenomics, click here.
Texas looks to receive $41 billion in taxpayer money provided by Congress in the $1.9 trillion American Relief Plan Act (ARPA). With $31 billion being sent to the state, this is 25% of the state’s annual budget. This excessive spending in D.C. has become the norm and now they’re trying to push their profligate spending onto Texas.
We must not let that happen, and here’s how to stop it.
ARPA funds to Texas include $11.2 billion already released to public schools. Soon, there will be $10 billion for local governments and $4 billion for only water, sewage, and broadband projects. And $15.8 billion in more flexible funding will head to the state in one payment, since Texas’s unemployment rate is more than 2 percentage points above the pre-pandemic rate.
Not only are these funds adding to the skyrocketing national debt, but they’re also more than what Texas needs. The state and local governments already have balanced budgets or surpluses. And to make matters worse, these funds come with strings attached which jeopardize state sovereignty and our republic’s future.
The U.S. Treasury recently released guidance (a Fact Sheet) for the restrictions on how state and local governments can use the ARPA funds. There will now be a 60-day period for public comments on this guidance before additional clarity will be provided.
In the meantime, it appears that the state cannot use these funds for deposits into pension funds or for direct or indirect state tax cuts, except for special cases that don’t seem to apply in Texas, even though cuts by state or local governments seem legitimate and advisable.
The tangle of strings attached to this ARPA money makes it almost impossible to shrink government. Furthermore, states with respectable fiscal track records, like Texas, are being punished while irresponsible state and local governments, like California and Austin, are being rewarded.
Given the strings attached, if the state accepts ARPA funds, Texas’ approach should be a pro-growth, long-term strategy to strengthen the state while assisting struggling Texans still affected by the pandemic and the shutdowns.
The strategy should strive to return these funds to taxpayers by reducing and keeping taxes lower than otherwise, funding only one-time expenditures, and rejecting all or most ARPA funds with strings attached.
This strategy would help avoid expanding government, reduce the impact on state sovereignty, mitigate the rising burden of the federal government’s high spending and debt, and provide relief to families.
Texas would recover faster, and would better withstand the Biden administration’s onerous policies by using the $15.8 billion in more flexible funding on the following options to Keep Texas Texan.
We should allocate $9 billion for federal unemployment trust fund loans and replenish the state unemployment fund to avoid massive tax hikes that would be needed to fund these.
We should use $5.1 billion in ARPA funds directly or those swapped out with state general revenue to complete the border wall and add border security to provide relief of the border crisis and stop using state taxpayer dollars every biennium for this purpose.
And with property taxes continuing to climb, we should use the other $1.7 billion to provide a 2-cent compression of local school M&O property taxes for additional tax relief this session. Adding the extra $3 billion that Comptroller Glenn Hegar recently announced is available would mean there’s an opportunity to provide a 5.5-cent compression. Since these are technically local taxes, this could be a way to navigate around the unwise restrictions imposed by D.C.
These expenditures should be done in a way that ensures accountability and transparency to taxpayers.
There should be no ARPA funds for ongoing expenses to avoid fiscal cliffs that led to problems a decade ago, when Democrats argued there were “cuts” to public education when Obama’s one-time “stimulus” funds ran out. And these funds should be placed in a separate budget article from the base budget like the Foundation’s Conservative Texas Budget does. And spending should be posted on the Comptroller’s or Legislative Budget Board’s website.
There are other good ideas on how to use ARPA funds, but they may be restricted because of the many strings attached, which is why there should be more clarity from the Treasury. Thus, with so many hoops to jump through, Texas should strongly consider rejecting some or all the funds.
Particularly those with strings attached that would weaken the state’s fiscal and economic situation by creating fiscal cliffs in subsequent sessions, eliminating tax relief opportunities through December 31, 2024, and more. Rejecting ARPA funds would also give Texas an opportunity to help provide relief from the Biden administration’s gambit to bankrupt America with $6 trillion either passed or proposed in legislation during his first 100 days in office.
Texas is a sovereign state. It’s time D.C. recognizes that.
Texas looks to receive roughly $40 billion in taxpayer money provided by Congress through the American Rescue Plan Act (ARPA). This includes $11.2 billion already released to public schools and soon to be released $10 billion to local governments and $4 billion to infrastructure projects (i.e., only water, sewage, and broadband projects). And $15.8 billion in more flexible funding to the state in one payment given Texas’s unemployment rate is more than 2 percentage points above the pre-pandemic rate.
Approach Given Restrictions
The U.S. Treasury recently released guidance (Fact Sheet) for the restrictions on how state and local governments can use the ARPA funds. There will now be a 60-day period for public comments on these restrictions before additional clarity will be provided. In the meantime, it appears that the state cannot use these funds for deposits into pension funds or direct or indirect state tax cuts, except for special cases that don’t seem to apply in Texas while local tax cuts by state or local governments seem legitimate and advisable. Given strings attached, if the state accepts ARPA funds, there should be a pro-growth, long-term strategy to strengthen Texas while assisting struggling Texans from the pandemic and shutdowns.
The strategy should strive to return these funds to taxpayers by reducing and keeping taxes lower than otherwise, funding only one-time expenditures, and rejecting all or most ARPA funds with strings attached. This strategy would help avoid expanding government, reduce the impact on state sovereignty, mitigate the rising burden of the federal government’s high spending and debt, and provide relief to families. Texas would recover faster and better withstand the Biden administration’s onerous policies by using the $15.8 billion in more flexible funding on the following options to Keep Texas Texan.
If Texas accepts some or all the funds, consider the following:
Provide Texans with Relief
$9 billion for federal unemployment trust fund loan and replenish state fund to avoid tax hike.
$5.1 billion for border wall completion and border security to provide relief of border crisis.
$1.7 billion for a 2-cent compression of local school M&O property taxes to provide relief.
Ensure Accountability and Transparency
No ARPA funds for ongoing expenses to avoid fiscal cliffs (e.g., pub ed “cuts” after ARRA).
Place funds in separate Article from base budget like TPPF’s Conservative TX Budget
Publish receipts and outlays of funds on Comptroller’s or LBB’s website.
Replace general revenue with federal funds for only one-time items.
Support Reform—May be restricted but possibly by swapping general revenue appropriations
Fund Other Post-Employment Benefits (OPEB) with reforms for sustainability.
Swap with GR to pay down state debt with a high interest rate.
Use to fund defined-contribution retirement accounts or similar reforms for new employees.
Swap with GR to fund expanded special education microgrants created during COVID.
Swap with GR to fund market-based healthcare with direct primary care and other options.
Texas should consider rejecting some or all the funds, particularly those with strings attached that could create fiscal cliffs in subsequent sessions, eliminate tax relief opportunities through December 31, 2024, generate school finance problems, and more.
By Vance Ginn, Ph.D. and Quinn Townsend
Families in Alaska, whether in good or bad economic times, practice responsible, priority-based budgeting. They must make decisions, often difficult ones, on how best to spend their hard-earned dollars. The same is true for small business owners who must prioritize their spending to keep their doors open, meet payroll, and provide for themselves.
Alaska’s government should do the same, and even more so given it’s not their money.
The way to do this is for the state to practice priority-based budgeting, whereby legislators take a close look at how every taxpayer dollar is spent. By doing so, state officials can allocate funding so that it doesn’t exceed the state’s ability to pay for it, as appropriately measured by population growth plus inflation.
Considering Alaska budget trends over the last two decades, there has been an improvement since 2016. During the period from 2001 to 2015, the average annual budget increased by 9.9%, which was three times faster than population growth plus inflation. Since then, the budget has declined annually by 7.3%, on average, while this key measure increased by just 1.6%, meaning that the recent growth of state government has helped to correct for prior excesses.
From 2001 to 2021, the budget grew on an average annual basis by 4.7%, which was nearly double that of population growth plus inflation. The excesses in the earlier period compounded over time to result in an inflation-adjusted state budget per capita in FY21 that is 10.9%, or $601 million, more than this key metric.
Some in Alaska have argued that there is no more fat to trim from the budget, that the state has cut everything it can since the highest spending years. But because the enacted budget, year after year, allocates more state funds than the state is able to sustain, it’s clear that difficult decisions are necessary. Just like a family or business prioritizes their budget based on necessities before wants, Alaska must be responsible and do the same.
This is why a fiscal rule of a responsible spending limit on state funds in Alaska is essential. This can be achieved by capping state appropriations to growing no more than population growth plus inflation every year.
As noted above, if the budget had matched population growth plus inflation over the last two decades, the state could have saved about $800 per Alaskan this year. This means the state would be budgeting about $600 million less in FY21 thereby helping to avoid its current attempt to dig itself out of a fiscal crisis and would probably not have drained its savings accounts either.
But we can’t change the past, only learn from our mistakes and do better. Much better. This will take responsibility and discipline, two things common to Alaskans.
Alaska Policy Forum’s Responsible Alaska Budget sets the maximum threshold on state appropriations based on population growth plus inflation over the last year, similar to what a meaningful spending cap should do.
Specifically, our maximum threshold on FY22 state appropriations is $6.18 billion after an increase of 0.92%. Achieving this feat and working to increase the budget less than this amount will help immensely in reducing the cost of funding government.
History has demonstrated that governments cannot spend and tax their way to prosperity. Alaska’s spending over the past two decades has proven that.
Policymakers should consider Alaska Policy Forum’s Responsible Alaska Budget and work to further limit spending. Keeping spending levels lower will not only serve Alaskans’ interests, but it will also make Alaska more economically competitive so that residents have more opportunities to achieve their hopes and dreams.
Vance Ginn, Ph.D., is chief economist at the Texas Public Policy Foundation based in Austin, Texas. He is the former chief economist of the White House’s Office of Management and Budget (OMB) during the Trump administration.
Quinn Townsend is the Policy Manager at Alaska Policy Forum based in Anchorage, Alaska. Previously, Quinn worked as the Economic Research Analyst at The Buckeye Institute. She completed her M.S. in Resource Economics and Management at West Virginia University.
A recent Wall Street Journal article claimed “U.S. Debt Is at a Record High, but the Risk Calculus Is Changing.” But is that calculus really changing? According to some, the government can borrow and print all the money it wants without repercussions.
Modern Monetary Theory (MMT) advances the puerile notion that we have somehow moved beyond the antiquated restriction of scarcity under which our ancestors labored. This thinking is reminiscent of the childish fantasy that our actions will not have consequences, but realities like scarcity are inescapable.
What adherents of MMT have really done is determined their socialist agenda and then reconstructed the policy tools available to support the agenda. It’s a sneaky move but one not based on reality nor economics.
But our point is not to counter every flaw of MMT, but rather to note that similar bad economics is snake oil sold to us by those who supposedly have “better” economic theories.
The notion being peddled today is that D.C. can spend trillions of taxpayer dollars, run up massive deficits, fund most of it by the Federal Reserve through money creation, and voilà, no inflation—reminiscent of a bad magic trick. A growing body of political activists in economists’ clothing subscribe to this view. Inflation has become a dirty word, unbefitting modern discourse among intellectuals.
But ask yourself: Am I paying more for food and gasoline? Are home and rent prices going up, and property taxes with them? Are cars more expensive? Is lumber more expensive?
It seems everything is getting more expensive, and that is price inflation—a rise in the general price level of a basket of goods and services. But what exactly causes it?
You’ll hear all kinds of explanations. Some have blamed greedy businesses for raising their prices. Some have blamed grasping unions for demanding higher wages. Some have blamed the consumer-at-large for being a spendthrift.
Yes, businessmen are greedy—everyone is. Yes, unions are grasping—everyone is. Yes, the consumer is a spendthrift—everyone is. But they don’t cause inflation.
Inflation originates in one place: behind the façade of a Greek temple on Constitution Avenue in Washington, D.C.—at the Federal Reserve.
The Fed can create money out of nothing—or more technically, create money out of government debt. Only the Fed can churn out unlimited money, and that is why only it can cause inflation. Businessmen, consumers, unions, and investors do not have this magical printing press and so they cannot cause inflation.
But why does creating money cause inflation? Wouldn’t we be better off if we all had more money?
Imagine that Santa Claus writes you a check for Christmas equal to the amount of money you already have. You now have twice as much money! But imagine Santa does the same thing for everyone else. Shortly thereafter, the price of nearly everything you purchase would be about twice as expensive because there’s too much money chasing too few goods.
That is inflation—and the Fed has been playing Santa Claus.
As the big spenders in D.C. take the country further into debt, the Fed has been there to write trillion dollar checks to pay for it. Normally, the government would have to borrow money from the public—which doesn’t cause inflation but does crowd out private sector activity. But for more than a year now, the Fed has kept its printing press in overdrive, thereby artificially holding down interest rates and distorting economic activity.
Initially, this appears to create an economic boom, as everyone thinks he’s better off with his government “stimulus” check and increased spending. But remember that nothing is free in a world of scarcity. Everyone discovers that others also have more money, and that prices are rising as more dollars chase fewer goods and services.
This inflation also acts as a tax on us as it reduces our purchasing power. Put simply, government uses inflation to confiscate a portion of your savings and your wealth.
If inflation averages just 2% per year (the Federal Reserve’s target), the government will have confiscated about half the value of your liquid wealth in just 36 years. For context, one measure of general price inflation was 2.6% for the 12 months through March 2021, but 4.1% in the first quarter of 2021 based on another measure. At a 4% average annual rate, the hidden tax of inflation will seize half of your money’s purchasing power in a mere 18 years.
Perhaps the Federal Reserve is not playing Santa Claus, but the Grinch. Instead of the massive spending boondoggles by the Biden administration and resulting costly repercussions, we need rules that limit excessive government spending and excessive money creation.
Texas will likely receive roughly $40 billion in taxpayer money provided by Congress through the American Rescue Plan Act (ARPA) for a number of budget areas: roughly $12 billion to public schools, $10 billion to local governments, and $4 billion to infrastructure projects (i.e., water, sewage, and broadband). Texas looks to also receive $17 billion in more flexible funding to state government.
Approach Depends on Restrictions
There are restrictions on how state and local governments can use the ARPA funds, but we will not know details on these restrictions until the U.S. Treasury issues guidance. Generally, these restrictions include using the funds for direct or indirect cuts to state taxes or deposits into pension funds. Given these restrictions, if the state is going to accept these funds, the best approach would be to follow a pro-growth, long-term strategy to provide relief to Texans from the struggles imposed by COVID-19 and shutdowns.
The chosen strategy should keep taxes lower than otherwise, reduce government debt obligations, fund only one-time expenditures, and reject all or most funds with strings attached to avoid expanding government and to reduce the impact on the country’s high spending and debt burdening America. Doing so will help provide relief from the effects of the pandemic and associated shutdowns. Using this strategy would help Texas recover faster and better withstand the onerous policies by the Biden administration to Keep Texas Texan by considering the following options for the $17 billion in more flexible funding.
If Texas accepts some or all the funds, the following uses should be considered:
Support Key Priorities
In response to the Texas Comptroller’s announcement that state revenue would be more than $3 billion higher than expected for the 2022-2023 biennium, the Texas Public Policy Foundation’s Vance Ginn released the following statement:
“The Texas Comptroller’s improved estimate of tax collections from primarily an improving COVID-19 situation and opened economy shows that the Legislature has $3.1 billion more available for the Texas budget. Both the House and Senate have already voted in favor of budgets that cover the state’s priorities and stay within the average taxpayer’s ability to pay for them. Therefore, the responsible approach to addressing the additional tax collections should be to give taxpayers relief—especially more toward property tax relief—to help Texas families and businesses.”
Texas Comptroller Glenn Hegar forecast $115.65 billion available for general-purpose spending in 2022-23, which is up $3.12 billion from January.
72% of Texans say property taxes are a major burden
TPPF Conservative Texas Budget: $246.8 Billion
Texas Senate Committee Substitute Budget: $244.7 Billion
Texas House Committee Substitute Budget: $240.9 Billion
This table provides an apples-to-apples comparison of amounts appropriated for the 2020-21 budget from the Legislative Budget Board’s (LBB) Fiscal Size-Up and each chamber’s 2022-23 appropriated amounts. We compare each chamber’s appropriated amounts with the Foundation’s Conservative Texas Budget (CTB) limits for state funds and all funds (state and federal) based on a maximum increase of 5% in population growth plus inflation over the last two fiscal years.
We exclude from the 2020-21 budget the designated $8.3 billion in Hurricane Harvey recovery one-time expenses and $5 billion in general revenue for school district M&O property tax relief in HB 3 from the 2019 session. Likewise, we exclude from each chamber’s version of the 2022-23 budget the $6 billion in general revenue to maintain last session’s property tax relief—which without this allocation would result in school district M&O property taxes rising 7 cents and likely in increased spending—and will exclude one-time COVID-related funding. The exclusion of one-time expenses for a declared disaster recovery is important for budget transparency and for not inappropriately inflating the base by that amount allowing for excessive spending later.
Fortunately, the passed versions of the budget by the Senate and the House fall well below the CTB limits in state funds and all funds, and neither appropriates money from the rainy day fund. This must be maintained—with hopefully more tax relief—by the conference committee and Governor Abbott to account for the average Texas taxpayer’s ability to pay for government spending while leaving more money in the productive private sector to let people prosper.
The Texas Public Policy Foundation’s Chief Economist Vance Ginn and economist E.J. Antoni break down the massive spending proposals in President Biden’s recent address to Congress.
$225 billion toward high-quality childcare and ensuring families pay only a portion of their income toward child-care services, based on a sliding scale
Raising taxes from one pocket to put money in the other is just shuffling dollars. The subsidies will also increase the overall cost of child care for those who need it.
$225 billion to create a national comprehensive paid family and medical leave program
Americans should be free to negotiate compensation packages like paid leave as they see fit; it shouldn’t be dictated by a bureaucrat. The consequence of a government-mandated paid family and medical leave will be lower wages and less opportunities for those with less skill and experience.
$200 billion for free universal preschool for all 3- and 4-year-olds, offered through a national partnership with states
Parents want valuable schooling options for their kids, especially during critical years of early development, not rhetorical fallacies that something is free. Instead of creating another spendthrift program with a profligate bureaucracy behind it that will reduce the quality of preschool like government has to K-12 education, government should focus on removing imposed barriers of high taxes and marriage penalties that reduce parents’ resources to meet their child’s unique needs.
$109 billion toward ensuring two years of free community college for all students
College, including community college, is not always the right fit. Some people enter trade or technical schools or begin their careers right after high school. This is especially true among those with lower lifetime earnings. “Free” college programs just take tax money from those with lower earnings to pay for the tuition of those who will likely have higher potential lifetime earnings. Government-guaranteed funding for higher education will also further inflate costs and reduce quality as things are rationed without market prices.
About $85 billion toward Pell Grants, and increasing the maximum award by about $1,400 for low-income students
Pell Grants, like many subsidies for higher education, benefit school administrators more than students. As subsidies increase, so does tuition, and so do administrative costs. Students eligible for Pell Grants often take out student loans to cover the remainder of their education expenses and they graduate with heavy debt burdens. To help make higher education more affordable, government should remove demand subsidies and supply restrictions, forcing schools to compete for students by slimming down their bloated administrative departments and by increasing access to lower tuition.
A $62 billion grant program to increase college retention and completion rates
There is no evidence that a lack of funding is causing retention problems at colleges and universities. There is, however, substantial evidence that low-quality government-run primary and secondary schools have failed to provide students with the knowledge and skills to succeed at the college level. The solution is not more government spending, but more educational choice throughout the education system.
A $39 billion program that gives two years of subsidized tuition for students from families earning less than $125,000 enrolled in a four-year historically Black college or university, tribal college or university, or minority-serving institution
Subsidies in higher education is what’s leading to the rapid increases in tuition, so doubling down on that is poor policy rather than finding ways to increase competition and lower prices while improving quality.
$45 billion toward meeting child nutritional needs, including by expanding access to the summer EBT program, which helps some low-income families with children buy food outside the school year
This is another government program that is fraught with waste and inefficiency. We would do better to lift burdensome regulations and taxes off the backs of small business, stimulating development, investment, and job growth. A parent with a well-paying job can afford to feed his or her own children.
$200 billion to make permanent the $1.9 trillion COVID-19 stimulus plan’s provision lowering health insurance premiums for those who buy coverage on their own
This sounds like a subsidy for those buying health insurance, but it is actually a subsidy for the insurance companies. After the implementation of the Affordable Care Act, which would supposedly reign in profits of the insurance companies, those profits reached record highs. People want more choices for healthcare, not handouts to insurance companies.
Extending through 2025, and making permanently fully refundable, the child tax credit expansion that was included in the COVID-19 relief bill
As Ronald Reagan said, nothing is so close to eternity as a temporary government program. The justification for transitory COVID-19 relief was the pandemic, which is now far past its peak as we approach herd immunity. There is no reason to continue these temporary relief measures going forward.
Making permanent the recent expansion of the child and dependent care tax credit
These tax credits are accomplishing the opposite of the bipartisan welfare reforms of the 1990s. Instead of rewarding work, they reward idleness. These government handouts will serve to trap people in a cycle of poverty and dependency.
Making permanent the earned income tax credit for childless workers
This is another example of a government program taking on a life of its own. The American Rescue Plan Act (ARPA) tripled the credit and gave benefits to childless workers that were previously reserved to working parents. The justification for this ill-conceived measure was the temporary hardship from government-imposed lockdowns; there is no reason to make them permanent but rather open their economies so people can find jobs and prosper. The effect of these government handouts is to keep people in low-wage jobs because the tax credit is quickly phased out as income rises. Once again, these programs cause dependency on government instead of letting people prosper.
It’s easy to tell who the Texans are in a crowd; you simply shout, “the stars at night, are big and bright”—then wait for about the span of four quick claps.
It’s easy to tell if a budget in Texas is truly conservative—and worthy of the great Lone Star State’s commitment to freedom and prosperity. If the biennial budget grows less than population plus inflation—our formula for a Conservative Texas Budget (CTB)—then it’s a budget that doesn’t grow beyond the average Texan’s ability to pay.
We love budget and tax cuts, of course; the Texas Legislature should take every opportunity to ease the burden on taxpayers, leaving more of their money in their own pockets. Yet the CTB is a useful guideline for lawmakers.
The good news is that both the House and Senate versions of the 2022-23 budget come in well under the CTB level.
This is a big win for Texans (see this thread), and it includes rightfully rejecting funding for Medicaid expansion in the budget, which effectively kills this attempt by the left. There are better, more affordable ways to help those in need rather than just providing government-run coverage that does not result in quality, timely care, as market-based reforms that put patients in charge would do.
There are other conservative policy victories in the budget, as well. It defunds some corporate welfare, it requires proposals of some state agency cuts each session, and it improves the process in determining the use of COVID-19 relief funds from the federal government.
Note that we appropriately don’t count these federal funds in our budget calculations because they haven’t been accepted yet (and much if not all with strings attached should be rejected) and should be used for only one-time expenditures to keep from unnecessarily growing government and then falling into the trap like the state did when the federal funds from President Obama dried up.
Now, some are saying that the budget doesn’t provide additional property tax relief for Texas families. That’s true. But it does preserve property tax relief from the last biennium. This is relief just like it was last session, when $5 billion was allocated toward lowering school district M&O property taxes—which meant taxpayers paid less than otherwise.
The $6 billion in this budget is to fund that same 7-cent property tax rate compression because of rising appraisals across the state. If that $6 billion wasn’t in the budget, then property owners would face a 7-cent tax increase and those funds would go to other programs that grow government.
So, the $6 billion is property tax relief by keeping property taxes and the size of government lower than otherwise—that’s certainly better than the alternative.
The next step in the budget process is for the conference committee on the budget to iron out the differences of a gap of $4 billion more in the Senate budget than the House budget, which the amount of expected federal funds is the main difference. This should include continued spending restraint for actual tax cuts and additional tax relief before the end of session.
There are a few key amendments to the budget by the House that lawmakers should keep, including:
Asking state agencies to provide proposed cuts of 1%, 5%, and 10% each session;
Defunding more corporate welfare; and
Improving federal COVID-19 funds determination.
Overall, this approach to the budget is a key part of TPPF’s Responsible Recovery Agenda that will support more growth, job creation, and economic opportunity in Texas.
It’s never hard to tell who the Texans are in a crowd, and in a crowded legislative session, it’s not hard to tell which budgetary decisions are the right ones. They’re the ones that lead to more freedom and more prosperity for Texans like the Legislature looks poised to do.
Let’s start with a simple fact: It’s not economic “stimulus” when someone comes along, takes money from your right pocket and puts some of it back in your left pocket (keeping much of it for “other uses”). That’s sleight-of-hand, not stimulus, which is a reason the government can’t stimulate anything other than more government.
That’s more and more true when less and less of the funds go back in your pocket. And make no mistake, President Joe Biden’s plans for a third “stimulus” bill—eclipsing the previous two—isn’t about helping struggling Americans hit hard by the pandemic and the shutdowns. Instead, it’s a massive, pork-laden bill that seeks to keep many of his lavish campaign promises and shore up support among key constituencies.
And nowhere is this more evident than in the area of climate activism.
According to CNBC, “The recovery plan, to be unveiled this week, will likely involve installing thousands of electric vehicle charging stations and building millions of new energy-efficient homes.” (Note to President Biden: Out-of-work Americans can’t afford new electric vehicles.)
Biden’s plan to “Build Back Better” also “supports his broader goal to achieve carbon-free power generation by 2035 and net-zero emissions by 2050”—an impossible goal that, even if it was achievable, would have little effect on global temperatures.
But that’s not all.
The Washington Post reports that it would spend “hundreds of billions of dollars to repair the nation’s roads, bridges, waterways and rails. It also includes funding for retrofitting buildings, safety improvements, schools infrastructure, and low-income and tribal groups, as well as $100 billion for schools and education infrastructure.”
And he plans a slew of massive tax hikes to help pay for it.
He could raise the corporate tax rate from 21% to 28%, which would destroy hundreds of thousands of jobs, and raise taxes on American individuals. These actions and others would undo key parts of the Tax Reform and Jobs Act of 2017 that combined with deregulation helped launch tangible economic prosperity until the global pandemic.
Each of these initiatives—climate activism, massive “infrastructure” spending and tax hikes—is bad economic policy in and of itself. Together, they’re a trifecta of terrible, guaranteed to overburden our economy and saddle us and future generations with more government, more debt and less opportunity.
History demonstrates that despite the promises of a Green New Deal, new green jobs prove elusive—and the ones that are created are very, very expensive, which requires more government spending of our hard-earned tax dollars that reduces growth and jobs in the process.
Here’s what President Obama said in his 2008 acceptance speech at the Democratic National Convention: “I’ll invest $150 billion over the next decade in affordable, renewable sources of energy—wind power, and solar power, and the next generation of biofuels—an investment that will lead to new industries and 5 million new jobs that pay well and can’t be outsourced.”
That never happened.
Obama himself later acknowledged that “Shovel-ready was not as shovel-ready as we expected.” That went for both the climate jobs (his policies sent solar panel manufacturing to China, for example, and other companies simply misled the government, took the money and declared bankruptcy) and for infrastructure jobs.
The good news is that we know what works. We can truly support more self-sufficiency, dignity, and human flourishing by fully opening the economy up.
Americans aren’t clamoring for a Green New Deal (when they’re told what it will cost), but they sure would like to dine out, see family members again and open up their businesses without the heavy-handed pandemic measures imposed by governments at every level.
It begins with Congress rejecting the third “stimulus” boondoggle. States should also reject some if not all of the latest round of bailout money to keep from unnecessarily expanding government programs and losing some independence to the federal government. And Congress should instead adopt the Texas Model of less spending, lower taxes and more reasonable regulation.
A great next step would be for the Biden administration to lift its “halt” on new oil and gas permits on federal lands and in federal waters.
That action alone would achieve all three of Biden’s stated goals for his “stimulus”: It would reduce emissions by allowing access to cleaner-burning natural gas, it would support many new and existing high-paying jobs for Americans (instead of outsourcing them to other countries, which we’ll be forced to buy our petroleum from), and it would support infrastructure improvement through the taxes producers pay for their use of our roads and bridges.
Another step would be to rein in excessive government spending that is bankrupting our country.
Ultimately, we can regain the prosperity we had before the pandemic—but not with Biden’s progressive plan.
Toyota Financial Services recently announced that as a result of consolidating customer service centers, the Cedar Rapids facility will close and cut 600 jobs, due in part to the private sector employing 5% fewer people than a year ago. The consolidation of customer service centers is a loss for Iowa and a win for other states, such as Texas. Businesses are responding to both economic climates and the new work environment brought about by the COVID-19 pandemic.
States with high tax rates are seeing an exodus of both people and businesses while those with lower rates are seeing them arrive in droves. This is yet another example of how people vote with their feet when the burden of government becomes excessive.
Iowa has made progress in recent years by lowering the individual and corporate income tax rates, but policymakers should beware of becoming too complacent, and they should work to continue reining in spending and lowering rates to attract people and businesses.
Many states have or are gradually lowering their personal and corporate income tax rates. This happened at the federal level during the Trump administration and many people had tangible prosperity that they’d never experienced. But the Biden administration may soon reverse those gains if progressives in D.C. have their way, which makes more competitive tax systems in Iowa and other states essential.
Legislatures in Arizona, Mississippi, and West Virginia are currently considering bills to phase-out their state income tax. For Iowa to remain economically competitive, it must follow suit. Iowa’s tax rates matter because we are in direct competition with 49 other states for businesses, jobs, and people. For example, South Dakota, Iowa’s neighbor, does not tax individual or corporate income, making it far more economically competitive.
Texas, another no-personal-income tax state, is a national leader in terms of economic growth and attracting both people and businesses. Iowa could also learn from Texas’s recent property tax reform in 2019, which limited growth in property taxes without voter approval to 3.5 percent for local governments and to 2.5 percent for school districts. They are even considering improving their tax system by eliminating nearly half of their property taxes.
Higher tax rates not only deter economic growth, but they also penalize hard-working individuals, families, and businesses. Taxes on income are considered the most harmful of taxes as they discourage productivity, hiring, and investing in Iowa.
In 2018, Governor Kim Reynolds and the Republican-led legislature passed pro-growth tax reform that lowered income tax rates and broadened the sales tax base. Reducing tax rates and practicing responsible spending policies is making Iowa more competitive and economically strong.
As a result of the 2018 law, this year Iowa’s corporate tax rate fell from 12 percent, the highest in the nation, to 9.8 percent—matching Minnesota’s. Even at 9.8 percent Iowa still has the third high corporate tax rate in the nation.
In 2023, the income tax is scheduled to be reduced to 6.5 percent—making it more competitive in the region. The caveat is, for the rate reduction to occur, it must meet two stringent revenue triggers.
First, state revenues must surpass $8.3 billion. Second, revenue growth must be at least 4% during that fiscal year. The use of revenue triggers in state tax policy can be a good idea but creating a high threshold can unnecessarily delay tax rate reductions and reduce the necessary restraint on government spending—the driver of higher tax burdens.
Lowering income taxes should not be hindered by the 4% growth trigger, so repealing it to use any revenue above $8.3 billion for cutting the income tax would reduce a major roadblock to tax relief and provide taxpayers with more certainty they can use to plan for their more prosperous futures.
Gov. Reynolds continues to stress the importance of making Iowa’s tax code more competitive. The Iowa Senate has passed legislation that will repeal both revenue triggers and phase-out the obsolete inheritance tax. Both measures would place taxpayers first and make the state’s tax code more competitive.
Iowa can look to states such as Texas, Indiana, North Carolina, among others that are creating pro-growth tax codes and practicing fiscal restraint. To be an economic leader in the Midwest—and to let people prosper—Iowa cannot afford to become complacent.
“Hey Florida! Help is Here.”
That’s how Vice President Kamala Harris recently put a 21st Century spin on Ronald Reagan’s famous quote, “The nine most terrifying words in the English language are: I’m from the Government, and I’m here to help.”
What does this have to do with the Texas budget and House Bill 3548? Let me explain.
The premise of the Vice President’s tweet is that government’s job is to swoop in and solve all of our problems. The premise of Reagan’s quote is that too often, government is the problem—or at least standing in the way of solutions. Reagan was right, of course; government fulfills some necessary functions, but in most cases, more government means less freedom.
That’s why we at the Texas Public Policy Foundation have labored for years to chisel the idea of a Conservative Texas Budget into the hard granite at the Texas state capitol. Our reasoning is clear — people don’t need more government; they need more opportunity. And our simple formula reflects that: The state’s total budget, which is the footprint of government funded by taxpayers, ought not to grow faster than our population growth plus price inflation. This spending limit is reflected in Rep. Matt Krause’s committee substitute for HB 594, which has been referred to the House Appropriations Committee.
Growth beyond that equation is an excessive growth of government—meaning bigger state agencies, which inevitably assume more and more regulatory powers to themselves. And a bigger budget also means more taxes, since states (unlike the federal government) can’t hide behind deficit spending. Government shouldn’t grow faster than the citizens’ ability to pay for it.
Now, state Rep. Greg Bonnen, who chairs the House Appropriations Committee, has had his HB 3548 referred to that committee. And Sen. Kelly Hancock, a member of the Senate Finance Committee, has the companion SB 1336 that will be heard before the Senate Finance Committee (of which he is a member). This legislation would improve the state’s current weak spending limit by expanding the base to all general revenue funds and by changing the growth limit to one closely related to ours of population growth times inflation.
It’s important to note that the Conservative Texas Budget is a ceiling, not a floor. It’s a limit on how much the budget can increase, not a target. There’s no limit on shrinking government, cutting taxes and reducing regulations. That course would be best for Texans, and TPPF has outlined many ways in which lawmakers should do so. Our top 10 legislative priorities for this Session, which we call our Liberty Action Agenda, provides a clear path for legislators to shift power and prosperity back to the people of Texas.
While Chairman Bonnen’s and Sen. Hancock’s legislation would set an improved formula closer to ours into stone and ensure that future Legislatures comply, we are pleased to see that both the House’s and the Senate’s introduced (proposed) budgets fit within our guidelines. Our math says that a total of $246.8 billion in all funds for 2022-2023 would represent a 5% increase over the last biennium, matching the growth in population plus inflation. Both proposed budgets came in under that number after excluding $6 billion toward maintaining property tax relief from last session instead of growing government.
Historically, lawmakers have been too ready to increase the Texas budget and grow government. But in 2015, we introduced the Conservative Texas Budget, giving legislators a clear bar. Prior to this, the average growth rate of the biennial budget from 2004 to 2015 was 12%. With the Conservative Texas Budget in place, the average growth rate was just 5.5%. More importantly, before 2015, the average growth rate of appropriations exceeded that of population plus inflation by almost 5 percentage points, while since then, growth has been limited to an average of almost a full percentage point below population and inflation.
The Conservative Texas Budget provides a path toward responsible state spending. It has proven to be successful at restraining excessive growth in government in the past, and it will continue to do so in the future if followed each session.
That’s why Chairman Bonnen’s and Sen. Hancock’s legislation, which codifies much of the Conservative Texas budget, is so important. It’s the help Texas families truly need.
“Stimulus” checks are in the mail to many (but not all) Americans, and the news is awash in stories about the best ways to spend that $1,400, and even speculation about whether we’ll see a “stimmy rally” on Wall Street.
But Texans are smart enough to know that no check from the government comes without strings attached.
President Joe Biden’s $1.9 trillion monstrosity is filled with a progressive “wish list;” only about 9% of the funds have to do with the pandemic.
Additionally, it will add substantially to the national debt, saddling us and our kids and grandkids with the tab while moving toward another redistribution recession as these funds reduce incentives to work, open states, and move off of government dependence.
And to make things worse, President Biden is already planning huge tax hikes to pay for more that would ultimately be paid by workers.
It’s no different for the states, which will also be receiving ARPA funds soon. There’s no such thing as free “stimulus” money; there are always strings attached. That’s why Texas’s leaders must be very careful with the roughly $43 billion from the American Rescue Plan Act (ARPA) they’re slated to receive. We must use the money wisely, and possibly, not to use it at all.
Some of the money is already earmarked. As for the more flexible funding the state will receive, Texas can expect about $17 billion to state government and $10 billion to local governments.
The Texas Attorney General’s Office, along with its counterparts in 20 other states, are already questioning the biggest string attached to the funding—Congress’ stipulation that it not be used “to either directly or indirectly offset a reduction in the net tax revenue.”
They rightly argue in a letter to Treasury Secretary Janet Yellen that this provision oversteps the federal government’s authority and could be used to prevent any state from cutting any tax. We need answers from her as soon as possible, especially as legislative sessions in Texas and elsewhere are quickly coming to an end.
On Monday, White House Press Secretary Jen Psaki seemed to confirm this interpretation of the bill. “The original purpose of the state and local funding was to keep cops, firefighters, other essential employees at work and employed, and it wasn’t intended to cut taxes,” she said.
The best strategy for the Texas leadership would be to follow a pro-growth course that lets people prosper without government interference. This approach would seek to keep taxes lower than otherwise, reduce debt obligations and fund only one-time expenditures. And Texas should reject all or most funds with strings attached.
We don’t need to adapt our approach to taxes and spending to fit the vision of progressives in Washington; we already have the successful Texas Model, thank you very much.
We must ensure that we don’t spend taxpayer money in ways that will create fiscal cliffs later on. Boosting public education funding with ARPA, for example, would result in public education “cuts” once that money is gone, and those “cuts” would be met with loud demands for more money from Texans, as was the case after receiving President Obama’s “stimulus” funds in 2009.
We must stick with one-time purchases, or paying off things, if possible, like loans to the federal unemployment insurance trust fund of at least $6.6 billion, paying down state debt that was borrowed at a high interest rate, better funding and reforming other post-employment benefits, or funding startup costs for market-based options in education and health care.
And we would like to see a high level of transparency and accountability. Ideally, all spending related to ARPA would be separated from the rest of the state’s budget and documented clearly on a government website.
But we have something even bolder to suggest: Texas should use some of the funding to extend the border wall, addressing another growing crisis.
The best way to help Texans recover from the economic devastation wrought by the government’s response to the pandemic is simply to let them return to work. ARPA ignores this. Instead, it’s a distraction from the onerous hikes in taxes, spending, and regulation by the Biden administration.
So, if Texas is going to accept this money (and rejecting it in full or in part should be strongly considered given the many restrictions and strings attached), let’s use this taxpayer money wisely, and ensure it goes to help keep Texas Texan.
Iowa Gov. Kim Reynolds and the Republican-led legislature have mainly been following fiscal conservative principles of limiting spending and reducing tax rates. Gov. Reynolds even received an “A” grade from Cato Institute’s 2020 Fiscal Policy Report Card on America’s Governors for her fiscal conservatism.
As a result of conservative budgeting practices, Iowa’s fiscal house was not only prepared for the economic emergency caused by the COVID-19 pandemic, but it remains in strong condition. Iowa’s budget has a $305 million surplus, and over $770 million in reserves.
Still, there is room for improvement.
Families across Iowa, whether in good or bad economic times, practice priority-based budgeting. Families must make decisions, often difficult ones, on how best to spend their hard-earned dollars. The same is true for small business owners across Iowa who must prioritize their spending to not only keep their doors open but meet payroll and provide for themselves.
As households across Iowa prioritize spending, governments should do the same, and even more so given it’s not their money. This results in a sound reason for government to practice priority-based budgeting or zero-based budgeting, whereby legislators take a close look at how every taxpayer dollar is spent.
Gov. Reynolds has proposed an $8.1 billion budget for Fiscal Year 2022. Although this increase from the $7.77 billion FY 2021 budget does not seem like much, this growth is more than the average taxpayer’s ability to pay, as appropriately measured by population growth plus inflation.
This would compound the higher taxes that Iowans are paying to fund their government.
From 2013 to 2020, Iowa’s budget has grown 1.6 times faster than population growth plus inflation. This means that the cost of government is increasing at a faster rate than the average taxpayer’s ability to pay for government. This does not include the high property tax burden placed on taxpayers by local governments or the $9 billion in federal funds that Iowa received in FY 2019.
If the budget had matched population growth plus inflation over that period, it would have saved a family of four, on average, $430 per year. This may not appear to be a large savings, but for most families an extra $430 is a vehicle payment or extra money to place in savings. Either way, it is more choices of how to spend their hard-earned dollars.
Both Gov. Reynolds and legislative leaders have voiced their concern that Iowa needs a more competitive business tax climate, which the Tax Foundation ranks 40th in the nation. Taxes and spending are two sides of the same coin and Iowa’s high individual and corporate income tax rates will not be reduced if spending is not limited.
Controlling spending will take discipline.
Iowa’s budget has a 99 percent spending limitation in law, which means that the legislature must spend at least 1 percent less than projected revenues. Strengthening the spending limit with a constitutional amendment and limiting spending to no more than population growth plus inflation would help keep spending in line with the average taxpayer’s ability to pay. This is an important measure because it accounts for more people paying taxes and higher wages that are highly correlated with inflation.
The Tax Education Foundation’s Conservative Iowa Budget sets the maximum threshold on appropriations based on population growth plus inflation over the last year. Specifically, the maximum threshold on 2022 General Funds is $7.88 billion after an increase of 1.38 percent. Achieving this feat will help keep more money in Iowans’ pockets so they have abundant opportunities to prosper.
Controlling spending is the most difficult thing for a government to achieve because the demands on government continue to grow. Numerous special interests are also applying pressure on the legislature for greater spending, which often crowds out the voice of taxpayers.
History has demonstrated that governments cannot spend and tax their way to prosperity. Iowa only needs to look at our neighbors in Illinois to see the consequences of out-of-control spending.
Policymakers should consider the Conservative Iowa Budget and work to further limit spending. Keeping spending levels low will not only serve the taxpayers’ interests, but it will also make Iowa more economically competitive so that they have more opportunities to achieve their hopes and dreams.
John Hendrickson is policy director at Tax Education Foundation of Iowa and Vance Ginn, Ph.D., is chief economist at the Texas Public Policy Foundation based in Austin, Texas. He is the former chief economist of the White House’s Office of Management and Budget (OMB) during the Trump administration.
The COVID-19 pandemic has changed our routines, but it doesn’t change the laws of economics. Yet it seems government is in the business of doing something when it really should do nothing, such as the recent proposals by President Biden and Congress to spend more and raise the federal minimum wage in the name of pandemic relief.
These actions would not only make a bad economic situation worse, especially for the ones the policies are intended to help, but they would destroy the unity that the president says he wants.
We’ve already seen the devastation that government action can cause during the pandemic, as the broad U6 unemployment rate remains at an elevated 11.1% and almost 800,000 people are filing initial jobless claims every week. The government shutdowns are an unfolding tragedy, and we won’t know their full extent for years to come.
But, as usual, there’s another attempt to put a patch on the American economy with an unnecessary, poorly crafted monstrosity of a $1.9 trillion COVID-19 relief package, which includes raising the federal minimum wage from $7.25 to $15 per hour by June 2025.
This boondoggle sends taxpayer money to people through checks when real personal income reached a record high in 2020. Its higher unemployment payments will distort incentives to work. And it will bail out profligate state and local governments when they’ve already received nearly three times more in taxpayer funds than their estimated losses.
Collectively, this package could delay the needed reopening of our economy, the only real path to regain Americans’ taken prosperity.
The focus of a package—if it must be done—should be to get the vaccines out as quickly as possible to open America now so that people can regain their prosperity they had before the pandemic. Better yet, a pro-growth approach of spending restraint, tax relief, and deregulation would be a better federal response.
In fact, the latter two measures (tax relief and deregulation) were practiced by the Trump administration and it contributed to records of the highest real median household income and lowest poverty rate in 2019. And while President Trump’s budgets found more fiscal savings than any other president, Congress continued to spend excessively—thereby bankrupting us and our country in the process.
But what’s getting a lot of media attention recently without much consideration of its cost is the Raise the Wage Act that the Democrats in Congress are trying to push through. This arbitrary hike of the federal minimum wage would be a mistake as it would separate us in terms of economic status and further divide us as a nation. That’s not what I would consider as “unity.”
According to a 2019 Pew Research poll, about two-thirds of Americans supported increasing the minimum wage to $15. But at what cost, given that nothing is free?
For example, the Congressional Budget Office recently reported that passing the Raise the Wage Act could mean as many as 2.7 million workers lose their job and earn the real minimum wage of $0. This would also come at the cost of $54 billion more to the national debt, further bankrupting us. And while the number of people lifted up from poverty could be 900,000, many of them will face higher prices, higher taxes, and higher interest rates making it harder for even those lucky enough to not lose their jobs to make ends meet.
But this analysis misses two key points that should not be overlooked: 58.5% of Americans earning the minimum wage are between 16 to 24 years old, and costs of living vary greatly across states, with California being 50% more expensive than Texas.
This means that those who will be hit hardest by raising the minimum wage are those just trying to get their foot on the bottom rung of the economic ladder, and typically have other sources of income. In fact, raising the minimum wage can benefit high-wage, highly skilled people at the expense of low-wage, low-skill people as employers move from labor to capital in their operations. This actually increases income inequality.
And states that have done a good job in keeping the cost of living low, like Texas (due to more pro-growth policies resulting in increased economic freedom) are hit hardest compared with those that don’t, like California. We should let federalism’s system of “laboratories of democracy” continue to prove that people vote with their feet, as the number of Californians moving to Texas increased by 36% in 2018.
America may still be suffering through the chaos of COVID-19, but that doesn’t mean we need more of it. President Biden should give doing nothing a chance, especially his policies that will bankrupt the country and force increased unemployment.
Vance Ginn, Ph.D.