Government Spending Is The Problem
The late, great economist Milton Friedman said, " The real problem is government spending."
​
This is true as spending comes before taxes or regulations. In fact, if people didn't form a government or politicians didn’t create new programs, then there would be no need for government spending and no need for taxes. And if there was no government spending nor taxes to fund spending then there would be no one to create or enforce regulations.

​While this might sound like a utopian paradise, there are essential limited roles for government outlined in constitutions and laws. Of course, most governments are doing much more than providing limited roles which preserve life, liberty, and the pursuit of happiness. This is why I have long been working diligently to get a strong fiscal rule of a spending limit enacted in all states and at the federal level promptly under my calling to "let people prosper," as effectively limiting government supports more liberty and therefore more opportunities to flourish.

Fortunately, there have been multiple state think tanks that have championed this sound budgeting approach through what they've called either the Responsible, Conservative, or Sustainable State Budget.

When Did It Begin?
I started this approach a decade ago with my colleagues at the Texas Public Policy Foundation with work on the Conservative Texas Budget which began in 2013. The approach is a fiscal rule based on an appropriations limit that covers as much of the budget as possible, ideally the entire budget, with a maximum based on the rate of population growth plus inflation and a supermajority (two-thirds) vote to exceed it. A version of this approach was started in Colorado with their taxpayer's bill of rights (TABOR), which was championed by key folks like Dr. Barry Poulson and others.  (picture below is from a road sign in Texas)

Why Population Growth Plus Inflation?
​While there are other measures to use for the growth limit, this metric provides the best reasonable measure of the average taxpayer's ability to pay for government spending without excessively crowding out their productive activities. It is important to look at it from the taxpayer’s perspective rather than the appropriator’s view given taxpayers fund every dollar that appropriators redistribute from the private sector. Population growth plus inflation is also a stable metric reducing uncertainty for taxpayers (and appropriators) and essentially freezes inflation-adjusted per capita government spending over time.

​The research in this space is clear that the best fiscal rule is a spending limit using the rate of population growth plus inflation, not gross state product, personal income, or other growth rates. Given the high inflation rate more recently, it is wise to use the average growth rate of population growth plus inflation over a number of years to smooth out the increased volatility. And this rate should be a ceiling and not a target as governments should be appropriating less than this limit, ideally freezing or cutting government spending at all levels of government to provide more room for tax relief, less regulation, and more money in taxpayers' pockets.

Overview of Conservative Texas Budget Approach
Figure 1 shows how the growth in Texas’ biennial budget was cut by one-fourth after the creation of the Conservative Texas Budget in 2014 that first influenced the 2015 Legislature when crafting the 2016-17 budget along with changes in the state’s governor and lieutenant governor. And the 8.9% average growth rate of appropriations since then was been below the 9.5% biennial average rate of population growth plus inflation over the latter period, which this was drive substantially higher after the latest 2024-25 budget that is well above this key metric (before this biennial budget the growth rate was 5.2% compared with 9.4% in the rate of population growth plus inflation). 

​And this approach was mostly put into state law in Texas in 2021 with Senate Bill 1336, as the state already has a spending limit in the constitution. The bill improved the limit to cover all general revenue ("consolidated general revenue"), base the growth limit on the rate of population growth and inflation, and raise the vote to three-fifths of both chambers to exceed it. There are improvements that could be made to SB 1336, such as adding it to the constitution and improving the growth rate to population growth plus inflation instead of population growth times inflation calculated by (1+pop)*(1+inf). But this stronger limit is likely the strongest in the nation as historically the gold standard for a spending limit of the Colorado's Taxpayer Bill of Rights (TABOR) has been watered down over the years. 

My Work On The Federal Budget In The White House
From June 2019 to May 2020, I took a hiatus from state policy work to serve my country as the associate director for economic policy at the White House's Office of Management and Budget. There I learned much about the federal budget, the appropriations process, and the economic assumptions which are used to provide the upcoming 10-year budget projections. In the President's FY 2021 budget, we found $4.6 trillion in fiscal savings and I was able to include the need for a fiscal rule which rarely happens.

Work With Other States
When I returned to the Texas Public Policy Foundation in May 2020, as I wanted to get back to a place with some sense of freedom during the COVID-19 pandemic and to be closer to family, I started an effort to work on this sound budgeting approach with other state think tanks. This contributed to me working with many fantastic people who are trying to restrain government spending in their states and the federal levels.

​My hope is that if we can get enough state think tanks to promote this budgeting approach, get this approach put into the state's constitution and statute, and use it to limit local government spending as well, there will be plenty of momentum to provide sustainable, substantial tax relief and eventually impose a fiscal rule of a spending limit on the federal budget.

This is an uphill battle but I believe it is necessary to preserve liberty and provide more opportunities to let people prosper.

Responsible State Budget Efforts Across The Country
Here are the states (in alphabetical order) and state think tanks which I'm working with in some capacity or will be soon along with information on how this process is going in that state, which I will update periodically, with the successful versus not successful budgeting attempts being 17-5.

1. Americans for Tax Reform will soon release a map with every state's Responsible Budget based on this approach.
2. Alaska: Alaska Policy Forum released its third Responsible Alaska Budget, with the first two unsuccessful but the most recent being successful as it helped define the narrative about sound budgeting.
3. Colorado: Independence Institute will release its first Sustainable Colorado Budget soon.
4. Florida: James Madison Institute recently released its first Conservative Florida Budget, still waiting on results.
5. Iowa: Iowans for Tax Relief Foundation released its third Conservative Iowa Budget, and the first three have been mostly successful.
6. Kansas: Kansas Policy Institute released its second Responsible Kansas Budget, with the first two not being successful but improvements are being made to help rein in even more spending.
7. Louisiana: Pelican Institute recently released its first Responsible Louisiana Budget, with the first being unsuccessful.
8. Michigan: Mackinac Center released its second Sustainable Michigan Budget, with the first not being successful but the second one being successful in reining in excessive spending in a tough political situation.
9. Mississippi: Mississippi Center for Public Policy recently released its first Responsible Mississippi Budget and was successful.
10. Montana: Frontier Institute released one Conservative Montana Budget and one report on Responsible Local budgets, which has resulted in two successful CMBs and improved local budgets.
11. South Carolina: South Carolina Policy Council released its first South Carolina Conservative Budget and was successful.
12. Tennessee: Beacon Center released its second Conservative Tennessee Budget, with the first two being successful.
13. Texas: Texas Public Policy Foundation released its fifth Conservative Texas Budget, with the first four of five (2024-25 budget wasn't) being mostly successful, and the recent release of Responsible Local Budgets.
14. Federal: The Responsible American Budget to rein in federal government spending to support fiscal sanity in D.C., which is essential for the future of our country.

​
If you're interested in doing this in your state, please reach out to me.

P.S. Good write-up on this issue here by Dan Mitchell at International Liberty.​

President Calvin Coolidge regarded “a good budget as among the most noblest monuments of virtue.” Government spending is at the heart of sound public policy. President Coolidge understood the importance of economy in government in order to achieve sound public policy. President Coolidge’s fiscal conservatism is being exemplified at the state level by Iowa Gov. Kim Reynolds, who is making fiscal conservatism a priority resulting in benefits to Iowans. Gov. Reynolds, just as with Coolidge, understands that prudent budgeting is a virtue.

Despite the national economic malaise from high inflation and stagnant growth, Iowa’s fiscal foundation was strong heading into the 2023 legislative session.

Last year, Gov. Reynolds and the Iowa Legislature continued to place a priority on prudent budgeting. The general funds budget for fiscal year 2023 was $8.2 billion, increasing by just 1 percent from the prior year. This session the legislature enacted an $8.5 billion budget for fiscal year 2024, which is a 3.6 percent increase from the previous year’s budget.

This holds the budget well below the Conservative Iowa Budget, which set a cap on the budget of $8.8 billion based on the maximum rate of population growth plus inflation of 7.4 percent. In other words, taxpayers benefit from the budget growing well below the growth of the economy, allowing more money in the productive private sector.

In January, Gov. Reynolds proposed an $8.48 billion budget, which reflected her priorities including funding the Students First Act, which created a universal Education Savings Account program. After budget negotiations between the House and Senate, the Legislature passed a budget that was a slight increase from the governor’s original proposal. The $8.5 billion budget spends only 88.25 percent of projected tax collections.

Since 2018, Gov. Reynolds and the Legislature have placed an emphasis on passing tax reforms and restraining the growth of spending. This approach has left more money in taxpayers’ pockets with a substantial tax relief package headed toward a low flat tax by 2026. What too many people overlook is that significant tax cuts like Iowa’s are only made possible by years of prudent and conservative budgeting. Without spending restraint, any tax relief, regardless of the tax, becomes impossible.

The evidence is clear that prudent budgeting is paying off for Iowans.

Iowa’s budget continues to be in surplus. The surplus for fiscal year 2023 is projected to be $1.7 billion and the current estimated surplus for fiscal year 2024 is projected to be $2 billion. In addition, Iowa’s reserve accounts (Cash Reserve Fund and the Economic Emergency Fund) will continue to be funded at their statutory limits with a combined balance of over $961 million. The Taxpayer Relief Fund will also continue to increase. The balance in the Taxpayer Relief Fund for fiscal year 2023 is $2.7 billion and this is estimated to increase to $3.5 billion in fiscal year 2024.

Both Gov. Reynolds and legislative leaders have signaled that further income tax reform will be a priority for the 2024 legislative session. The Taxpayer Relief Fund, which was originally created for the purpose of income tax relief, will be instrumental in further income tax rate reductions. Iowa Senate Republicans introduced an income tax reform proposal this past session that if enacted would have sped up the income tax rate cuts and used the Taxpayer Relief Fund to phase-out the income tax altogether.

In addition to restraining spending, Gov. Reynolds also made some important reforms that will impact future state spending.

One of her major priorities was to reform state government. Gov. Reynold’s state government reform measure consolidates and makes government more efficient. Currently, Iowa has 37 executive branch cabinet agencies – more than all neighboring states. The governor’s proposal will reduce the number of executive-level agencies to 16, streamlining and cutting bloated bureaucracy while saving taxpayer dollars. It is estimated that this plan will save taxpayers over $214 million over four years. This was the first major reform of Iowa’s bureaucracy in nearly 40 years.

Further, Reynolds issued an executive order at the beginning of the legislative session that requires an extensive review process of Iowa’s regulatory code. Both reforming Iowa’s bureaucracy and reducing burdensome regulations are essential in the path to sustaining limited spending.

​In its Fiscal Policy Report Card on America’s Governors 2022, the Cato Institute ranked Gov. Reynolds as the best governor. “Governor Reynolds has been a lean budgeter and dedicated tax reformer since entering into office in 2017,” wrote Chris Edwards and Ilana Blumsack, authors of the report.

This year, Gov. Reynolds and the Legislature are continuing this trend. Iowa is at the forefront of conservative budgeting that other states and the federal government should follow.

Originally published at The Center Square and co-authored with John Hendrickson at Iowans for Tax Relief Foundation.

​Thank you for checking out the 8th episode of "This Week's Economy,” where I briefly share insights every Friday on key economic and policy news across the country. Subscribe to receive new posts and support my work. 

Today I cover:
1) National: Breaking down the latest report on CPI inflation and how it relates to real average weekly earnings, what’s going on with the debt ceiling debate, and why the Fed should continue to raise its interest rate target and cut its balance sheet;
2) States: ALEC's newest "Rich States, Poor States" report findings related to where Texas stands in comparison with Utah and Florida, what the legislatures are doing late in the sessions of Texas (here), Louisiana (LA jobs report and tax relief), and elsewhere; and
3) Other: New findings on the importance of work-life balance, the value of the U.S. dollar, and more.

​You can watch this episode and others along with my Let People Prosper Show on YouTube or listen to it on Apple Podcast, Spotify, Google Podcast, or Anchor (please share, subscribe, like, and leave a 5-star rating!).

For show notes, thoughtful insights, media interviews, speeches, blog posts, research, and more, continue to check out my website (https://www.vanceginn.com/) and please subscribe to my Substack newsletter (https://vanceginn.substack.com).

​In Let People Prosper episode #42, I talk w James Hohman with Mackinac Center for Public Policy about improving Michigan's economy, right-to-work policies, corporate welfare, and budget.

​On today's episode of the "Let People Prosper" show, I'm thankful to be joined by James Hohman, Director of Fiscal Policy at the Mackinac Center for Public Policy and host of The Overton Window Podcast.

We discuss:
1) Right-to-work policies, workers' unions, and corporate welfare;
2) How shutdowns impacted the economy of his home state, Michigan; and
3) A path forward for the state, and others, to prosper with a Sustainable Michigan Budget and more.

​You can watch this interview on YouTube or listen to it on Apple Podcast, Spotify, Google Podcast, or Anchor (please share, subscribe, like, and leave a 5-star rating).

​James’ bio:

• James M. Hohman is the director of fiscal policy at the Mackinac Center for Public Policy, which publishes The Overton Window Podcast that he hosts. He holds a degree in economics from Northwood University in Midland, Mich.
  

​In Let People Prosper episode #41, I talk w Dan Mitchell, Ph.D., about the need government spending limits, benefit of flat tax revolution, Fed's booms and bust cycles, and more to let people prosper.

On today's episode of the "Let People Prosper" show, which was recorded on March 24, 2023, I'm thankful to be joined by Dr. Dan Mitchell, President of the Center for Freedom and Prosperity and blogger at ⁠International Liberty⁠.

We discuss:
1) Lessons from history on government spending and why strong spending limits are needed at every level of government;
2) Issues with the Fed creating artificial cycles of booms and busts; and
3) Reasons to be optimistic about the flat tax & and school choice revolutions happening in states across the country.

​You can watch this interview on YouTube or listen to it on Apple Podcast, Spotify, Google Podcast, or Anchor (please share, subscribe, like, and leave a 5-star rating).

Dan Mitchell’s bio:

• Dan Mitchell is President of the Center for Freedom and Prosperity, a pro-market public policy organization he founded in 2000. His major research interests include tax reform, international tax competition, the economic burden of government spending, and other fiscal policy issues.
• Having also worked at the Heritage Foundation and Cato Institute, he has decades of experience authoring papers, writing editorials, working with the public policy community, and presenting the free-market viewpoint to newspaper, television, and radio media. 
• Dan has spoken to a wide variety of groups in dozens of cities and more than 50 foreign countries. He also served on the editorial board of the Cayman Financial Review, and holds a Ph.D. in economics from George Mason University.

​For show notes, thoughtful economic insights, media interviews, speeches, blog posts, research, and more, check out my personal website and subscribe to my Substack newsletter where you can get every episode in your inbox.

​Budgeting responsibly is key to Louisiana’s Comeback Agenda, and Pelican’s Chief Economist, Dr. Vance Ginn, has released a plan to rein-in state spending.

Check out the proposed Responsible Louisiana Budget, below. This plan gives Louisiana a competitive advantage and is similar to those used in other states, like Texas and Florida, limiting the amount of funding appropriated at the beginning of each fiscal year, which has made lower taxes possible.

Originally posted at Pelican Institute.

​A new report by Dr. Vance Ginn, senior fellow at The James Madison Institute and president of Ginn Economic Consulting recommends that the state continue to limit the burden of government spending. The Conservative Florida Budget (CFB) sets a maximum threshold in all funds appropriations for FY 2024 of $116.2 billion. This maximum threshold is based on the 5.5% rate of the 3-year average of population growth plus inflation over the last three years from 2020 to 2022, which reasonably represents the average taxpayer’s ability to pay for government spending.  

“Legislators should use the CFB as a guide this session. Given the economic headwinds from the poor fiscal and monetary policies out of D.C. contributing to elevated inflation and risks of a deep recession along with past state budget excesses, the Legislature should pass a budget well below the CFB, similar to the Governor’s budget. Doing so will ensure a conservative budget that will help keep more money in taxpayers’ pockets through larger tax relief, so families and entrepreneurs have the most opportunities to flourish.” — Dr. Vance Ginn, Senior Fellow, The James Madison Institute; President, Ginn Economic Consulting.

Originally published by James Madison Institute.

With a debt ceiling fight and bank failures, Congress’ day of reckoning to spend less is now.

Inflation is sky-high, purchasing power is sinking, 60% of Americans live paycheck to paycheck, and credit card debt is soaring to nearly $1 trillion.

To make matters worse, between the fourth quarter of 2021 to the fourth quarter of 2022, U.S. real GDP grew by just 0.9%, the slowest growth in a “recovery” since at least 2009 amid the Great Recession.

The more the federal budget deficit grows because of excessive government spending, the more the budget is crowded out from funding legislative priorities. In turn, Congress is forced to find ways to pay for interest on the debt, which will soon exceed $1 trillion.

It’s not just the budget that’s getting crowded out; productive activity in the private sector fueled by entrepreneurs is stifled due to too much money chasing too few goods and services at the hands of tyranny imposed by big government.

The underlying culprits to these economic catastrophes are reckless, weaponized government spending, often funding tyranny against Americans, and the Federal Reserve holding a bloated balance sheet. This excess national debt and money printing contributed to the latest closure of Silicon Valley Bank and will have further consequences.

These government failures should be addressed by Congress spending less. This should include reducing federal funds sent to states. Not only do federal funds diminish federalism by making states dependent on the federal government but it also comes with massive red tape.

The U.S. system of federalism provides a unique laboratory of competition to see what works across the states. This is best observed and encouraged by letting states be as independent as possible. Considering that federal deficits are expected to increase by an average of $2 trillion annually over the next decade, states would be wise to prepare for fewer federal funds as Congress’ purse strings will tighten.

According to Congressman Chip Roy (R-TX) in a recent interview, another major way the government drives up spending is by hiding behind so-called mandatory expenditures such as Medicare and Social Security, and discretionary spending, which is funding tyranny through the weaponization of bureaucrats.

“We have to commit to not funding tyranny such as the IRS going after minorities and poor people,” said Congressman Roy. “Why should we fund the FBI labeling Scott Smith, a man who stood up for his daughter being sexually assaulted to her school board, a domestic terrorist? Likewise, military funding should go toward making us a strong defense, not to ensuring that recruits ‘stay woke’ and never say ‘sir’ or ‘ma’am.’”

While it’s politically popular for the government to honor its commitments like Social Security and Medicare for current retirees, mandatory spending is excessive and needs reforms to remain solvent over time. Cutting non-defense discretionary spending–including abolishing Departments of Education and Energy–to pre-Covid levels, would mean saving $3 trillion over the next decade.

But both Republicans and Democrats have to work at this as they’re equally culpable of driving up spending under many administrations. And these expenditure savings need to be closer to $8 trillion to stabilize the debt to output level per the Committee for a Responsible Federal Budget.

In addition to tightening up federal funds sent to states and mandatory expenses, the government should consider adopting a Responsible American Budget, similar to what’s been practiced in Texas, Florida, and Tennessee, that’s helping their economies thrive.

This would require adopting some sort of fiscal rule like a spending cap, but as Congressman Roy emphasized, without passing exceptions that would render the rule irrelevant.

If such a rule based on the maximum growth rate of population growth plus inflation, which represents what the average taxpayer can afford, had been in place, then we would have accrued $500 billion in new debt rather than $19 trillion over the last 20 years.

Returning the federal government to its constitutional role of preserving liberty is key to economic growth.

The surest way to suffocate the productive private sector from innovating and Americans from prospering is to let spending increases continue. This is the biggest threat to the American dream today, which younger generations are already counting dead as they’ve seen such poor economic growth in their lifetimes.

If the future of the nation and opportunities for upcoming generations is important, the government must earn Americans’ trust by spending less, reforming mandatory programs, cutting federal bureaucracy, and promoting other pro-growth policies.

​As Congressman Roy shared, “I didn’t inherit a free country to pass down an unfree one. We have to fight.”

Originally posted at The Daily Caller. 

Iowa’s fiscal foundation remains strong despite national economic uncertainty because of the state’s fiscal conservatism and prudent budgeting.

Governor Kim Reynolds has made Iowa a leader in conservative fiscal policy. This approach has already left more money in taxpayers’ pockets, and set the state on course to implement a low, flat income tax by 2026.

In its Fiscal Policy Report Card on America’s Governors for 2022, the Cato Institute “grades governors on their fiscal policies from a limited-​government perspective.” On this basis, Cato ranked Governor Reynolds as the best in the nation, writing that she “has been a lean budgeter and dedicated tax reformer since entering into office in 2017.”

Last year, Governor Reynolds and the Iowa legislature continued to place a priority on prudent budgeting. The $8.2 billion budget for fiscal year 2023 represented a mere 1 percent increase from the prior year. And for FY 2024, Reynolds has proposed an $8.5 billion budget, with the extra funds meant to cover the universal school-choice plan that the legislature recently passed.

Iowa’s anticipated $1.6 billion budget surplus for FY 2023 is nearly as much as the $1.9 billion surplus recorded in FY22, with another $2.2 billion surplus expected in FY 2024. The state should have $895.2 million in reserve funds in FY 2023 and $962.5 million in FY 2024 — the statutory maximum for those years. The state’s Taxpayer Relief Fund — the fund into which excess tax revenue is placed so that it can be returned to taxpayers by the legislature — was worth $1.1 billion in FY 2022, and is on track to grow to $2.7 billion in FY 2023 and then to $3.4 billion in FY 2024.

​In 2022, Iowa also enacted the most comprehensive income-tax-reform package in the nation. Over four years, the nine-bracket income tax will transform into a flat income tax with a 3.9 percent rate. The corporate tax has also already been reduced from 9.8 percent to 8.4 percent, and is set to gradually shrink until it reaches a flat 5.5 percent rate. These measures constitute a sound, pro-growth tax policy that will create incentives to work, save, and invest, and will make Iowa’s economy more competitive on the national stage.

Prudent budgeting is essential for ensuring that these income-tax cuts can be responsibly implemented. And on Governor Reynolds’ watch, Iowa’s tax revenues continue to grow, reducing the degree to which the tax cuts must be “paid for” through spending cuts. The most recent numbers, released in February, showed that revenues are at $35.9 million, or 5.7 percent higher than they were at the same time last fiscal year.

That said, in addition to proposing a fiscally prudent FY 2024 budget, Governor Reynolds is also proposing to rein in Iowa’s administrative state. It has been 40 years since Iowa made any major reforms to state government, and in that time the size and scope of government have increased. Reynolds is proposing to streamline the executive branch and reverse some of that growth.

C​urrently, Iowa has 37 cabinet agencies. The governor’s proposal calls for a 16-agency cabinet. She argues that government is both too big and too expensive, and streamlining it will result in more efficiency and better services for taxpayers. She estimates that if enacted, this consolidation plan would save taxpayers over $214 million in the next four years.

Although Governor Reynolds and the legislature have placed a priority on prudent budgeting, there is more that could be done. Iowa statute currently allows legislators to spend up to 99 percent of projected tax revenues. This rule should be replaced with one that would limit most spending to the rate of population growth plus inflation, which could have saved Iowans as much as $2.9 billion — or $3,700 for the average family of four — in taxes had it been in place since 2013.

Meanwhile, Governor Reynolds has already signaled that she does not want to stop at a flat income-tax rate of 3.9 percent. She has said she aims to lower the rate to a flat 2 percent, and to eventually eliminate the tax altogether while continuing to cut state-government spending.

Governor Reynolds should be applauded for putting Iowa on the path to a robust economy, and providing a model of sound fiscal policy for the federal government and other states to emulate. Now, she just has to keep at it, because there is more work still to be done.

Originally published at National Review Online. 

Both Republicans and Democrats at the national level have put us down a path of slow growth, massive deficits, and high inflation. With a new Republican majority in the U.S. House and the daunting debt ceiling fight over the bloated $31.4 trillion national debt almost exclusively due to excessive spending, there’s a proven pro-growth, pro-liberty path.

In 2022, the U.S. had real GDP growth of just 0.9 percent (Q4-over-Q4), the highest inflation in 40 years, the highest mortgage rates in 20 years, and the worst stock market in 14 years. Average real weekly earnings have now declined year-over-year for 22 straight months. 

Fortunately, history is a good guide for how to overcome this mess. The two of us have served as chief economists at the Office of Management and Budget (OMB), though 50 years apart. One of us (Arthur Laffer, originator of the “Laffer Curve”) was the first chief economist of the OMB in the Nixon White House. The other (Vance Ginn) was the last associate director for economic policy at the OMB in the Trump White House.

While much has changed since the OMB was formed in 1970, the problems are basically the same today. There remains a lot of unjustifiable government spending, prosperity-killing taxes, unwarranted regulations, excessive liquidity, and harmful interference in international trade. But just because counterproductive economic policies have been around for a long time doesn’t mean we shouldn’t try for a better world. 

Each of the above areas is the subject of intense debate. In politics, these debates have their short-term winners and losers as judged by elections. But the principles of economics aren’t determined by votes. The remedy for economic malaise has been and is less government, not more. Free-market, pro-growth policies are the cure. 

The legacy of the 1970s is now called the era of stagflation, and the 2020s are shaping up to be known for the same, or worse. Even with 50 years of experience, many people still haven’t learned a lesson. 

During the Nixon and Ford administrations, the economy was stifled at every turn. The dollar was taken off gold and devalued, resulting in higher inflation. Then there was the imposition of wage and price controls, which did nothing to stop inflation but instead ravaged the economy. Government spending was out of control. Taxes were raised, and tariffs imposed, including a 10 percent import tax surcharge; such was the wisdom of the D.C. crowd. 

The consequences were rising inflation, stock market collapse, impeachment, and a weak economy. Then, President Jimmy Carter tried to do more of the same with the same consequences. 

There followed a true renaissance, led by President Ronald Reagan’s tax and regulatory cuts and Federal Reserve Chairman Paul Volcker’s sound monetary policy. Inflation crashed, the stock market soared, new jobs surged, and Reagan won re-election in a landslide, winning 49 states. 

And then there was the sad interlude of George H.W. Bush, who broke his promise by raising taxes, leading to a one-term presidency.

President Bill Clinton, partnering as he did with House Speaker Newt Gingrich, cut government spending by 3 percentage points of GDP, cut capital gains tax rates while exempting owner-occupied homes from this tax altogether, and finally, he and the Republicans pushed the North American Free Trade Agreement (NAFTA) through Congress. On the bad side, he raised the top two tax rates. But the spending restraint contributed to a budget surplus for four straight years. 

President George W. Bush, with a penchant for spending more and for temporary tax cuts, was followed by President Barack Obama, with a desire on steroids to spend even more, plus he nationalized health care. Stagnation took hold, and prosperity faded.

In his first two years, President Trump reversed some of the prior 16 years of bad policy with substantial tax cuts, historic deregulation, and other measures that helped get government out of the way, contributing to the lowest poverty rate and the highest real median household income on record. But with the onset of the pandemic, prosperity was cut short by the ill-advised massive spending increases and lockdowns.

Today, we’re once again mired in a sea of bad policies and bad consequences despite President Joe Biden’s self-serving narrative. With tax hikes, massive spending, oppressive energy regulations, soaring debt levels, trade protectionism, and a bloated Fed balance sheet, stagflation was given a brand-new lease on life.

We should follow the proven, pro-growth path (not currently taken) of sound money, minimal regulations, free trade, flat taxes, and most of all, spending restraint for the sake of the economy and human flourishing. It’s also great politics. With this elixir in hand, it would be springtime again in America. And that is something Americans can believe in.

Vance Ginn, Ph.D., is an economist and senior fellow at Young Americans for Liberty and previously served as the associate director for economic policy of the White House’s Office of Management and Budget from 2019 to 2020. Arthur Laffer, Ph.D., is an economist from Nashville, Tennessee, and was the first chief economist of the White House’s Office of Management and Budget.

Originally published at The Federalist. 

​A tighter limit on state spending is a top priority for Republicans in the state House of Representatives this year, but a proposal to tie spending to gross domestic product is raising questions about whether a tighter limit will hamstring the state’s ability to fund critical services and weather future economic downturns.

Alaska already has a spending cap, enacted in 1982, based on the state’s population and inflation. But lawmakers have called it “the perfect law,” because it is so difficult -- essentially impossible -- to break. The state simply does not spend nearly as much as that limit allows for.

Now, House Republicans are indicating they favor a pair of bills that would force lawmakers to tighten the belt on the state budget even as they are considering hefty spending increases to shore up ailing services. The House Judiciary committee could advance the measures as early as Monday.

Proponents of a tighter spending cap say it will help prevent the boom-and-bust cycles that have dominated Alaska’s oil-based economy for decades. Gone will be the days, they say, when years of high oil prices are accompanied with fat budgets, and oil price crashes put the state in austerity. A spending cap will reign in the appropriators when the revenue fortunes are good, the argument goes, leaving money for years when revenue shrinks.

A new limit on state spending was part of a proposed framework for a new fiscal plan put forward by a bipartisan working group in 2021 which also listed new revenue sources and a new Permanent Fund dividend formula in its final report. Lawmakers from both parties agree that a new spending cap should be part of a fiscal plan, but they disagree on the order of business. Some think resolving the Permanent Fund dividend calculation should take precedence. Others say that new revenue streams for the state are most important. House Republicans, who dominate the chamber’s majority caucus this year, have cited a tighter spending cap as the first item they’d like to tackle.

The odds are stacked against the policy in a divided Legislature. And according to some policy analysts, that’s a good thing. Spending caps, opponents say, leave states with unwieldy budgets that cannot respond adequately to the state’s changing needs.

Still, proponents are charging ahead.

Chief among them is Sen. James Kaufman. An Anchorage Republican and retired oil and gas quality manager, he devised a new idea in 2021 to limit Alaska’s spending to a percentage of the state’s gross domestic product, excluding the public sector.

GDP measures the value of the goods and services produced in-state. While more than 20 states have some form of spending cap, none have tied their budgets to gross domestic product, a complex figure calculated by federal financial institutions.

In 2021, Alaska’s GDP was $57.3 billion, the smallest of all states except Wyoming’s and Vermont’s — two states with smaller populations than Alaska’s.

Kaufman says that the metric, rather than the more commonly used consumer price index or personal income, “is an accurate measurement of the state’s economic performance.” Excluding the public sector, which has accounted for roughly 20% of Alaska’s GDP in recent years according to data from the Federal Reserve Bank of St. Louis, puts the focus on Alaska’s private sector, dominated by resource development.

“Sometimes we have an embarrassment of riches where we have a lot of revenue come in, and the next year it can be radically different,” said Kaufman in an interview. “To try and break the boom-and-bust cycle, I started considering caps that would help that, and which caps would be the most helpful.”
Tying the state’s spending to the private sector “ensures that government does not outgrow the private sector that it is meant to support” and that the state avoids becoming overly dependent on revenue from the Permanent Fund, according to a statement accompanying the bill.
Kaufman’s policy would be based on an average of the preceding five years’ GDP. He is proposing a statutory limit set at 11.5% of that average, while a companion constitutional amendment would set the upper limit at 14%. That way, lawmakers could agree to exceed the 11.5% limit with a two-thirds majority, but would not be able to exceed the 14% ceiling.
Under the proposal, both the statutory limit and the constitutional limit would have to pass to be effective. It’s a tall order — constitutional amendments must be adopted by a two-thirds vote by both chambers of the Legislature.

It’s a tall order also for the state’s economy — of the last 20 budgets, all but three would have exceeded the proposed statutory limit. Half would have exceeded the proposed constitutional limit. Over the course of two decades, such a spending cap would have prevented the state from spending $5 billion, roughly the equivalent of an entire year’s budget.

Gov. Mike Dunleavy’s proposed spending plan for the coming fiscal year would exceed the proposed statutory limit, but remain below the proposed constitutional limit.

Dunleavy has favored a tighter cap on state spending and has proposed legislation to that effect during his first term in office, but he has yet to put forward such a bill this year.

Dunleavy spokesman Jeff Turner did not respond when asked if the governor intends to advocate for his own plan or for Kaufman’s. Instead, Turner said in an email that the governor’s office “does not comment on bills until they have passed the Legislature” because they can be substantially changed before that, and that “Dunleavy has always advocated for a plan to limit the growth of the state budget.”

Kaufman’s proposal has many exceptions: the limit would not apply to the Permanent Fund dividend, disaster relief or federal dollars, among other exceptions. But it would apply to all general fund spending on capital projects and operating expenses, which covers building and road maintenance, schools, public safety, and other programs that have seen effective cuts in recent years.

Kaufman said he settled on the 11.5% limit for the statutory proposal to match the exact level of spending in the 2022 fiscal year budget, which was shaped by low oil prices and lingering pandemic-era federal funding. Even amid these complexities, Kaufman calls it “kitchen table economics.”

‘Everybody would be worse off’
Comparing a state budget to household expenses is part of the problem, according to Bernie Gallagher, a policy analyst with the Center on Budget and Policy Priorities.

Gallagher said spending caps are inherently arbitrary and pinned to a particular moment in time. Just as Alaska’s previous spending cap proved too generous, a new spending cap could prove too onerous.

“It makes it very difficult to override that limitation when the capped amount is inadequate to meet the needs of state families or communities,” said Gallagher.

Kaufman’s efforts to design a more resilient limit to reign in Alaska’s fluctuating economy could prove to be insufficient, because GDP “is just as volatile as personal income,” Gallagher said.

“In fact, it has a slower rebound effect than personal income,” he added. “Many other states and conservative groups that do advocate for spending limits don’t use state GDP for that reason — because it’s just capturing too much.”

University of Alaska Anchorage economist Kevin Berry raised similar concerns about gross domestic product, saying it is a flawed mechanism for capping state spending, because it could exacerbate longer economic downturns, just like the one the state is currently facing.

In Alaska, where the oil industry makes up a large part of the private sector, a long-term downturn in oil prices could bring down the state’s GDP even if the population and its needs remain unchanged.

The bigger issue, Berry said, is that tying state spending to the GDP could prevent the state from responding to recessions with increased spending, as governments often do.

“What happens when the government ramps up spending, is it helps support households and support businesses and make the recession less bad,” said Berry, citing unemployment insurance as an example. “That money supports household incomes and that also leads to more revenue for businesses and prevents businesses from suffering and people going out of business. We stop the whole negative cycle that way.”

Tying spending to GDP, he said, would mean that during prolonged economic recessions, “at the same time the private sector would be struggling, the public sector would have to struggle too, so everybody would be worse off.”

Berry said that would be exacerbated by the fact that Alaska’s economy is what he called “counter-cyclical,” meaning it tends to do better when the Lower 48 economy is doing worse. Federal fiscal policy, in turn, is designed to meet the needs in the Lower 48, and sometimes works against Alaska’s interests.

“That means that federal policy is doing the opposite of what we want it to do in any given period, potentially, exacerbating our business cycle,” Berry said. During a recession, economic principles dictate that the state government might need to spend more money “to counter the cycle and smooth things out. But if you’ve got a spending cap that’s tied to GDP, we can’t do that.”

The bill makes an effort to overcome the potential problem by tying spending to a five-year average, rather than a single year. That isn’t necessarily enough, Berry said.

“The problem is, we’ve had a prolonged downturn. It’s very likely in the future at some point, we’ll have another prolonged downturn, and then we can get stuck in this trap,” he said.

‘Different things to different people’
Kaufman is a member of the Senate’s bipartisan majority, which has named improving the state’s long-term fiscal outlook as one of its priorities. But at a press conference, leaders of the caucus shrugged off Kaufman’s proposal.

“A long-term fiscal plan means different things to different people,” said Sen. Donny Olson, a Golovin Democrat who co-chairs the finance committee. Discussing a spending cap “highlights the fact that if you’re going to deal with a long-term fiscal plan, you’ve got to figure in where your new revenues are going to be coming from.”

Some Senate members appear interested in handling other elements of the state’s fiscal plan before they reconsider the spending cap.

“Before we can really, really focus on a long-term fiscal plan, we need to figure out the Permanent Fund dividend issue. That’s what we really need to do first,” said Sen. Elvi Gray-Jackson, an Anchorage Democrat.

Other senators said that a cap on spending from Alaska’s Permanent Fund revenue already in practice limits the money at the state’s disposal, thus limiting state spending. In 2018, lawmakers passed a law capping the amount that can be withdrawn from the earnings of the Permanent Fund based on the performance of the fund’s investments — or percent of market value (POMV) — to ensure that the Legislature does not overspend and deplete it over time.

“The revenue cap — the POMV law — actually provides us with a spending cap today, because it limits the revenue as long as we hold the line on that law. We still have to figure out where we spend the money but it means there’s a cap in place,” said Sen. Matt Claman, an Anchorage Democrat who chairs the Senate Judiciary committee, which is assigned to handle Kaufman’s proposal.

The proposed policy has seen more support from conservative House members who sit on the House Judiciary Committee, which is scheduled to take action on both the statutory limit and the constitutional limit on Monday. They could vote to advance the bill as is, amend it, or table it for further consideration. If the judiciary committee approves the measure, it still must pass scrutiny in the Ways and Means Committee, then the Finance Committee, before reaching the House floor.

“It’s very challenging for private enterprise to make long term decisions when there’s so much instability in policy, especially spending at the state level,” said Rep. Will Stapp, a freshman Republican from Fairbanks who is the primary sponsor for the measure in the House. “I like the fact that we are creating a link between state spending and Alaska’s private sector.”

If anything, Stapp said, his conservative colleagues wonder if the percentage limits proposed in the bill should be set even lower.

The new spending cap has backing from the right-wing Alaska Policy Forum. Vance Ginn, a Texas-based economist and fellow with the forum, told the House Judiciary committee that the measure would incentivize private sector economic growth while limiting the public sector. But Ginn appeared unfamiliar with the particulars of Alaska’s economy, including its reliance on the oil industry for revenue and the lack of broad taxes like an income tax.

Another prominent advocate for a tighter spending cap is the Alaska Chamber of Commerce, which has for several years listed the cap as the business group’s top priority.

Kati Capozzi, chamber president, said that the group’s advocacy for a new spending limit came in response to the crash in oil prices that occurred a decade ago, leading to what she called “the yoyo budget cycle,” and a perpetual fear among business owners that new taxes are on the way.

“The business community is constantly under pressure and frankly threatened that there’s going to be a tax increase every time we are unable to pay our bills. This would provide some security for the business community,” said Capozzi.

A spending cap is the “most important thing that needs to be addressed” in the state’s long-term fiscal plan, according to Capozzi, because it would provide “side rails” that would attract more investment in Alaska, by signaling to investors that a crash in oil prices would not lead to “a knee jerk reaction to go get more revenue from the business community.”

But Rep. Cliff Groh, an Anchorage Democrat who sits on the House Judiciary committee, wonders if limiting the state’s spending could hamper the business community in the long run.

“Given that corporate executives and people in charge of companies stress how much a highly qualified workforce is so important for setting up, for expanding or bringing their companies at all to a state — if the schools become crummy, the roads become crummy, and the public services are at such a low level it’s unattractive to employees — you can imagine that that can occur, that a certain improperly designed spending limit could lead to a smaller population and a smaller economy,” said Groh at a recent House Judiciary committee hearing on the measure.
Ginn responded that a review of spending caps in other states indicated that such limits force states to “really prioritize those dollars — wherever they should go — within that spending limit.”
“We need to have the least burdensome form of taxation on individuals … And a good big way to do that is to ensure that spending doesn’t go out of control so that we don’t need as many taxes,” said Ginn. “Additional spending doesn’t necessarily equal better outcomes.”
‘A red herring’Berry, the Alaska economist, said that while the GDP could be a flawed foundation for a spending cap, that doesn’t necessarily mean the idea of a stricter spending limit is bad.
“This is not to say that I’m for a spending cap or against a spending cap. I think that’s a policy choice the state needs to make. I think there’s just better ways to do it,” Berry said.
An alternative to the new mechanism would be adapting the existing spending limit to match existing revenue levels. Lawmakers are not currently considering such a proposal.
“The general idea of tying the size of government service to the demand for those services makes a lot of sense. So tying it to CPI (consumer price index) and tying it to population,” Berry said, referring to the 1982 limit. “Maybe we did set it too high, but it doesn’t require complex mechanisms to bring it down.”
Still, some economists argue that binding spending caps that tie the hands of lawmakers are never a good idea.
Gallagher, with the Center on Budget and Policy Proposals, said that experience in other states has shown that spending limits “do little or nothing to make government run any more efficiently or ensure that tax dollars are well spent. It shifts costs from states to cities and towns, which only moves the burden over to property taxes and fees.”
Gallagher said a better solution to Alaska’s spending volatility could be a progressive tax, like an income tax, that is more dependable year-after-year and ensures the burden of paying for state services does not fall disproportionately on a single group. Gallagher called that “a much more sustainable model” than Alaska’s current dependence on revenue sources that can fluctuate wildly.
“It’s a state that has massive, massive revenue volatility. Addressing that is really being lost. Addressing the spending side is actually a red herring. The real focus should be over on — are we collecting a sufficient amount for the needs of our state?” Gallagher said.
Yet more than a month into the legislative session, state lawmakers are not considering any new broad taxes. Dunleavy, a conservative Republican, has proposed shoring up state revenue by monetizing carbon through keeping trees standing and injecting carbon into the ground, in an effort to meet state needs without imposing new taxes on businesses or individuals. But skeptics say that even if that plan pans out, revenue is still years away and will hardly be enough to make up for falling oil returns in the future.
As lawmakers have debated the spending cap proposal, they have largely sidestepped questions on what would be required to meet a lower limit. Amid falling oil prices, state budgets over the past decades have translated to cuts to virtually every state service. And Alaskans are beginning to notice; private and public sector leaders have reported it is increasingly difficult to stem the tide of out-migration because state services like education, public safety and transportation infrastructure are not meeting expectations.
“One of the things that people don’t mention is a spending cap that’s binding, that requires cuts, requires identifying those cuts. So the question is, what are people talking about cutting?” Berry said.

Originally published at Anchorage Daily News. 

​Iowa’s taxpayers deserve better constitutional protections against the unquenchable appetite for government spending. Stronger limits can ensure spending remains under control, especially when fiscally conservative policymakers are absent.

Introduction

Going into the 2023 legislative session, Iowa’s fiscal foundation is strong. The Revenue Estimating Conference (REC), which is a three-person collaboration between the governor’s office and the Legislative Services Agency, is tasked with the difficult job of coming to consensus on the projections the state will use for budgeting.

In December, the REC estimated revenue for fiscal year 2023 (FY23) at $9.6 billion. Governor Kim Reynolds used December’s estimate to plan her proposed $8.5 billion FY24 budget. Iowa’s fiscal foundation remains strong despite the national economic uncertainty because of the state’s fiscal conservatism and prudent budgeting.

The benefits of this approach are clear.  Iowa’s anticipated $1.6 billion surplus for FY23 is nearly as much as the $1.9 billion surplus in FY22, with another $2.2 billion surplus expected in FY24. The state should have $895.2 million in reserve funds in FY23 and $962.5 million in FY24 — the statutory maximum for each year. Additionally, the Taxpayer Relief Fund is on track to increase by $1.6 billion, to $2.7 billion, in FY23, with another increase of $662.6 million in FY24, to $3.4 billion.

In short, the state government of Iowa is awash in cash thanks to conservative budgeting. These policies must continue to provide substantial tax relief, and lawmakers can build upon their success by passing a state budget below the recommendation of the Iowans for Tax Relief Foundation (ITRF). Our 2024 Conservative Iowa Budget sets a maximum threshold for general funds of $8.8 billion, based on 7.4 percent rate of population growth plus inflation (see Figure 1). Governor Reynolds’ budget proposal meets this goal.  The House and Senate now must offer up their budget targets and then all three proposals will have to be meshed together.  Spending restraint when crafting the state’s budget is always important, as it protects taxpayer dollars now and in the future.

​Figure1.

Source: Condition of the State: Vision for Iowa, State Budget FY 2024, Governor Kim Reynolds and Lt. Governor Adam Gregg

​Going a step farther, the state should write the Conservative Iowa Budget principles into its constitution or statutory code. Thus, Iowa would assure residents and businesses that it will continue to improve as a place to live, raise a family, and start a business, which will in turn strengthen the state’s trajectory.

Recent Iowa Budget
In its Fiscal Policy Report Card on America’s Governors 2022, the Cato Institute ranked Governor Reynolds as the best in the nation. “Governor Reynolds has been a lean budgeter and dedicated tax reformer since entering into office in 2017,” wrote Chris Edwards and Ilana Blumsack, authors of the report.

Last year, Governor Reynolds and the Iowa Legislature continued to place a priority on prudent budgeting. The budget for FY23 was $8.2 billion, increasing by just 1 percent from the prior year.

In 2022, Iowa also enacted the most comprehensive income tax reform package in the nation — the largest in state history. Over four years, the nine-bracket income tax will transform into a flat tax with a 3.9 percent rate. The corporate tax will also gradually shrink until it reaches a flat 5.5 percent rate and has already been reduced from 9.8 percent to 8.4 percent. These measures constitute a sound pro-growth tax policy that will create incentives to work, save, and invest. On the national stage, this tax reform will make Iowa’s economy more competitive.

Prudent budgeting is essential toward ensuring these income tax rate reductions can be responsibly implemented. Even with national economic uncertainty, Iowa’s revenue continues to grow, reducing the degree to which the tax cuts must be “paid for” through spending restraint.

​Governor Reynolds has reaped additional benefits from a fiscally conservative agenda with an executive order imposing a moratorium on regulations. Furthermore, state agencies must begin reviewing existing regulations to determine their relevance and economic impact to ensure “existing rules — each and every one — are worth the economic cost,” as Governor Reynolds stated. “Only those that meet this standard will be reissued. The rest will be repealed. When it’s all said and done, Iowa will have a smaller, clearer, and more growth-friendly regulatory system.” Agencies have four years to complete the review process. The governor is also proposing to rein in the administrative state by streamlining government, consolidating the 37 cabinet-level agencies to 16. The process has already begun, and the governor’s office estimates consolidating agencies and other administrative reforms will save taxpayers close to $215 million over the next four years.

​Source: Condition of the State: Vision for Iowa, State Budget FY 2024, Governor Kim Reynolds and Lt. Governor Adam Gregg

Need for Stronger Spending Limits
Most states have some form of TEL in statute or (less commonly) in the state constitution. A strong limit can ensure spending remains under control, especially when fiscally conservative policymakers are absent. However, not all TELs are created equal. An effective limit should be determined by the average taxpayer’s ability to pay for the priorities of government, not the appropriator’s cost of providing them.

Iowa has a weaker spending limitation than many states: a fiscal rule in state statute restricting the legislature to spending no more than 99 percent of estimated revenue. Efforts in the Iowa Legislature to strengthen this limit have proven unsuccessful, so far. Most recently, the Iowa Senate passed Joint Resolution 9 in 2017. This constitutional amendment would have limited the annual increase to the lesser of 99 percent of the estimated revenue or 104 percent of the prior year’s revenue. (Historical comparisons including the existing and proposed rules are visible in Figure 3 below.)

Iowa’s taxpayers deserve better constitutional protections against the unquenchable appetite for government spending. Families and businesses must make difficult budget decisions on a regular basis; this experience should not be so rare in government. With spending limitations in place, argues economist Daniel J. Mitchell, “politicians are forced to abide by the rules that apply to every household and business in the state. In other words, they have to prioritize,” 

Colorado has shown this principle in practice. In 1992, voters adopted the Taxpayer Bill of Rights (TABOR), which was a constitutional amendment limiting government spending of most general funds at the state and local levels to a maximum rate of population growth plus inflation. Voters must also consent to spending increases above that level. If revenue exceeds the limit, the money returns to taxpayers as tax rebates. Unfortunately, progressives have weakened Colorado’s TABOR over time, and the tax rebates have encouraged dependency on government rather than translating into tax rate cuts. Nonetheless, since its enactment, TABOR has returned $8.2 billion to taxpayers.

Other states enacted measures similar to TABOR, proving that different approaches can be successful. Kurt Couchman, a Senior Fellow with Americans for Prosperity, argues that a “rules-based structural balance is a promising alternative,” focusing on the following:

• Potential GDP growth
• Personal disposable income growth
• Personal income growth
• General economic growth

“Structural balance can provide both short-term policy stability and long-term fiscal responsibility,” according to Couchman, putting pressure on the growth of spending and utilizing debt brakes and revenue limits

Texas also has implemented a strong spending limitation. In 2021, the legislature codified a new spending limit in SB 1336, which is arguably now the strongest in the nation. Based on the Texas Public Policy Foundation’s Conservative Texas Budget, the new spending limit sets a cap on all general revenue based on the rate of population growth and inflation. Exceeding the cap requires a three-fifths vote in both chambers of the legislature. “This change effectively puts tax relief on Texas’ permanent agenda. Policymakers can lock in tax relief by tying Texas’s future fiscal surpluses to automatic tax cuts,” writes Michael Lucci, a senior fellow at the State Policy Network.

Because spending and tax limitations can take various forms, Matthew Mitchell, now a senior fellow at the Fraser Institute, contends the most effective will:

• Use a formula based on the sum of inflation plus population growth
• Be based upon spending rather than revenue
• Require a supermajority, rather than a majority, of lawmakers to be overridden
• Immediately refund revenue collected in excess of the limit
• Appear in the state constitution rather than in statute

Joining these guidelines with the examples described above, the ideal limit would cover the broadest base of the budget possible, with a maximum growth rate limited to population growth plus inflation. It would also return the resulting surplus funds to taxpayers through reduced tax rates, not tax rebates. Such a policy would give Iowa the strongest spending limit in the nation and solidify responsible budgeting in law for a consistent, predictable future.

President Calvin Coolidge regarded “a good budget as among the noblest monuments of virtue,” and it is incumbent upon Iowa’s lawmakers to be virtuous in this way.

Historical Iowa Budget
Figure 2 compares Iowa’s General Fund increase over the past decade with the state’s population growth plus inflation, as measured by the U.S. Chained Consumer Price Index (CPI). While the growth of appropriations has been below this benchmark for the full period, that result is attributable solely to the fiscal responsibility of the last four years.

Figure 2.

The relative recency of this proper balance places a spotlight on the need to implement policy to prevent backsliding.
Figure 3 illustrates the current statutory spending limit’s failure to control appropriations over time. Its weakness has allowed excessive growth in the budget over time. The figure also shows that Senate Joint Resolution 9 would also have been insufficient.

​Figure 3.

​In contrast to Iowa’s existing revenue-focused method, setting a spending limit that tracked with population growth plus inflation would have provided even more restraints on the expansion of government since 2013, leading to more conservative budgets and greater opportunities for tax relief. In fact, actual budget growth above this measure has been a cumulative $2.9 billion since 2013, meaning that taxes Iowans paid over that time period could have been at least $2.9 billion less . Put differently, an average family of four has paid nearly $3,700 more in taxes than if the state had adhered to a different spending limitation.

Conservative Iowa Budget
Iowans are fortunate that in recent years the governor and legislature have been budgeting in the spirit of the Conservative Iowa Budget. Even without a stronger state spending limit, the fiscal discipline exhibited by lawmakers has contributed to large surpluses and tax reforms and relief. To continue this conservative trend, ITRF is releasing the FY24 Conservative Iowa Budget with a maximum threshold of $8.5 billion, based on the summed rate of 7.4 percent. This target combines the 0.2 percent rate of state population growth with the 7.2 percent rate of U.S. chained-CPI inflation in 2022. Holding the Iowa state government’s budget to this level will provide opportunity for tax relief in the face of economic headwinds from bad policies out of D.C. A 40-year-high level of inflation (without corresponding wage growth) and market corrections responding to Congressional overspending, President Biden’s overregulating, and the Federal Reserve’s overprinting of money, make well-considered and consistent tax policy imperative.

Conclusion
Iowa has been at the forefront of conservative budgeting in the United States. This approach has left more money in taxpayers’ pockets with a substantial tax relief package headed toward a low flat tax by 2026. This process must continue to ensure Iowans’ flourishing.

​Fortunately, Governor Reynolds’s FY24 budget proposal continues her practice of fiscal prudence. Limits on spending will be paramount for further income tax reform, and the governor has already signaled that Iowa will not be complacent at 3.9 percent. Talk of lowering the income tax rate to a flat 2 percent with a pathway to eventually eliminating the tax keeps the focus where it ought to be. Rejecting complacency is important when it comes to state-government spending, too. A stronger spending limit will not only help to protect the interests of taxpayers, but it will also keep the growth of government in check. On its current path, Iowa can expect a robust economy, a flourishing civil society, and prosperous people, but the work of getting government out of the way while funding basic services is not complete.

​Originally published at Iowans for Tax Relief Foundation.

​Michigan lawmakers should be careful about the upcoming year’s budget.

There is a lot of uncertainty about what is coming, but lawmakers have more than $8 billion in extra cash on their hands.
They should adopt a Sustainable Michigan Budget to ensure that spending grows no more than the average taxpayer can afford.

That means spending no more than the rate of the state’s population growth plus inflation. Because of the recent spike in inflation, this gives the state more money to spend in the upcoming budget even though population declined slightly in 2022.

​Michigan lawmakers initially budgeted $44.09 billion in state funds last year, excluding federal transfers and small amounts of local and private money. Lawmakers should approve a 2023-24 budget that pledges to spend no more than $47.57 billion in state funds.

​The benefits of budget restraint are clear. It gets lawmakers to prioritize limited taxpayer funds and ensure residents get the best return on their dollars.

Due to past excesses, the budget has grown to be $6 billion [HJM1] more in the 2022-23 budget than it would be if it had followed the rate of population growth plus inflation over time. This amounts to $600 more dollars in taxes and fees paid per resident and more than $2,400 more, on average, for a family of four.

Instead of following a sustainable spending pattern, Lansing has added many items to the budget that limit the state’s ability to address priorities.

​Lawmakers added $1 billion worth of special grants for 149 select projects at the last minute of last year’s budget cycle. Without an open process and established criteria, lawmakers simply waste money on politically directed spending.

​The Sustainable Michigan Budget also ensures that legislators remain flexible.

Michigan has a balanced budget requirement, and lawmakers tend to interpret that as a recommendation to spend all of the collected tax revenue. This doesn’t give lawmakers a lot of room to respond to unexpected needs, like increased demand for Medicaid in the event of an unexpected recession. Plus, the desire to spend all tax revenue puts pressure on lawmakers to increase taxes if revenue drops or falls unexpectedly.

Passing the Sustainable Michigan Budget ensures legislators will have resources available to deal with an uncertain future.
The most important benefit is sustainability.

Spending less than the rate of population growth plus inflation would allow lawmakers to leave more money in taxpayers’ pockets while sufficiently funding limited government provisions. It provides certainty to Michigan residents and businesses about what the state government is going to collect each year and sets those rates at what taxpayers can afford.

Slowing spending on current services also means that the state can fix a lot of its long-term financial problems.

Lawmakers accidentally made school employees the state’s largest creditors by not saving enough to pay for all of the pension benefits promised to employees in the state-managed pension system. This is bad for teachers and taxpayers alike. Lawmakers can secure these pensions and save billions by using savings on current services to pay down pension debts.

Michigan has new legislators and new Democratic majorities in both legislative chambers. They will have different priorities on which spending is important to them than the last legislature.

One of their priorities ought to be for the growth of Michigan’s budget to be sustainable. It will take some restraint on their part not to spend every dollar they have available. This would improve the state’s financial position, require more judicious budgeting, and ensure that the state government remains sustainable.

Originally published at Mackinac Center for Public Policy.

​Key Point: Louisiana’s labor market looks okay even as the unemployment rate increased by 0.2-percentage point to 3.5% unemployment rate. But the labor force has 10,622 (-0.5%) fewer people in it than pre-shutdown in February 2020 and private sector employment is 30,000 (-1.8%) below then, indicating a much weaker labor market and economy overall.

Labor Market: A job is the best path to prosperity as work brings dignity, hope, and purpose to people through life-long benefits of earning a living, gaining skills, and building social capital. The table below shows Louisiana’s labor market over time until the latest data for December 2022 by the U.S. Bureau of Labor Statistics.​

The establishment survey shows that net total nonfarm jobs in the state increased by 4,800 jobs last month (+0.2%), bringing this to 50,700 jobs below the pre-shutdown level in February 2020. Private sector employment was up by 4,400 jobs (+0.3%) and government employment rose by 400 jobs (+0.1%) last month. Compared with a year ago, total employment was up by 46,200 jobs (+2.4%) with the private sector adding 45,600 jobs (+2.9%) and the government adding 600 jobs (+0.2%).
 
The household survey finds that the civilian labor force rose by 5,028 people last month and is down 10,622 people since February 2020, which results in the labor force participation rate of 58.5% being 0.1-percentage point lower than it was in February 2020 but well below the 61.2% rate in June 2009 at the trough of the Great Recession. The employment-population ratio is 0.9-percentage point above where it was in February 2020 and nearly back to where it was in June 2009. While the unemployment rate of 3.5% is substantially lower than the 5.2% rate in February 2020, a broader look at Louisiana’s labor market rather than this weak indicator shows that Louisianans still face challenges, especially compared with neighboring states based on several measures.

​Economic Growth: The U.S. Bureau of Economic Analysis (BEA) recently provided the real (inflation-adjusted) gross domestic product (GDP) in Q3:2022 for Louisiana and other states. 

​The following table shows how U.S. and Louisiana economies performed since 2020. The steep declines were during the shutdowns in 2020 in response to the COVID-19 pandemic, which was when the labor market suffered most. The decline in real GDP annualized growth of -3% in Q2:2022 was the 5th worst and increase of +2.5% in Q3:2022 ranked 23rd in the country. 

The BEA also reported that personal income in Louisiana grew at an annualized pace of +5.8% (ranked 19th) in Q2:2022 (tied +5.8% U.S. average) and of +2.5% (ranked 47th) in Q3:2022 (below +5.3% U.S. average).
 
Bottom Line: Louisianans gained jobs in December but continue to feel the costs of the shutdowns in 2020 and other restrictive policies that reduce opportunities for them to find well-paid jobs. Institutions matter to human flourishing in countries and states, which is floundering in Louisiana compared with many other states. The Fraser Institute recently ranked Louisiana 20th for economic freedom based on 2020 data for government spending, taxes, and labor market regulation. And the Tax Foundation recently ranked the Pelican State as having the 12th worst business tax climate and 15th highest corporate income tax rate. While the state has improved its tax code recently and lower taxes may happen soon from an expected budget surplus, this lack of economic freedom and poor business tax climate are contributing to a net outmigration of Louisianans to other states, which is a drain on the state’s economic potential now and in the future. State and local policymakers should work to reverse this trend by passing pro-growth policies.

​Free-Market Solutions: In 2023, the Louisiana Legislature should provide the state’s comeback story by:

• Passing pro-growth policies that limit government spending, reform and flatten taxes, expand school choice, improve workforce development, remove barriers to work, and reform safety nets.
• Improving the state’s economic situation will come from increasing economic freedom and individual liberty which will help Louisianans better resist D.C.’s overreach—which has resulted in stagflation—and better flourish for generations to come.

​South Carolina is getting on the right track when it comes to fiscal responsibility. In 2022, state lawmakers and Gov. Henry McMaster enacted the first-ever state personal income tax cuts, letting residents keep more of their hard-earned money and making South Carolina more competitive for business. Last year, voters also approved ballot measures requiring the state government to set more money aside in the event of an economic downturn. The next step is to get state spending under control, which can be achieved by following the Policy Council’s South Carolina Sustainable Budget (SCSB).  

​The SCSB provides a limit for annual general funds[1] appropriations using data based on the rate of state population growth plus inflation. This report provides appropriations recommendations for fiscal year (FY) 2024 and compares recent state appropriations with what spending would have looked like under a sustainable budget.  

​Based on population and inflation data in 2022, the recommended general funds appropriations limit[2] for South Carolina’s FY24 budget is $11.2 billion.

However, with inflation reaching a 40-year high, primarily because of the errant policies in D.C., this spending ceiling is higher than it would otherwise be under normal economic circumstances. Accordingly, the S.C. Legislature should consider freezing spending at the current FY23 budget amount of $10.34 billion. This would help to correct recent overspending seen in South Carolina’s budget and put our state on a more sustainable path. At a minimum, general fund appropriations in the FY24 budget must remain below $11.2 billion.

Overview
A sustainable budget, sometimes called a conservative or a responsible budget, is a model for state budgeting that limits appropriations based on population growth plus inflation. This metric serves as an indicator of what the average taxpayer can afford to pay for government provisions. In particular, it accounts for: 1) More people in the state who could potentially pay taxes, 2) Wage growth that’s typically tied to inflation over time to pay taxes, and 3) Economies of scale, as not every new person or wage increase should be associated with new government spending.

The SC Sustainable Budget does not make specific recommendations on how general funds should be appropriated. Rather, it gives legislators the flexibility to appropriate taxpayer dollars to government programs as determined by the General Assembly while ensuring that spending growth remains in line with what people can afford.
Such a voluntary spending limit is key to putting South Carolina in a position for further tax relief. In 2022, lawmakers cut and simplified our state personal income taxes – a policy supported by the Policy Council – and set up a trigger for additional, smaller cuts in the future. But smart budgeting will help accelerate the process of reducing income taxes and fuel other tax cuts. Unsustainable spending, on the other hand, could build pressure to reverse course and raise taxes, leaving South Carolinians with fewer opportunities to flourish.

SC Appropriations vs. Sustainable Budget
​Figure 1 compares the previous eleven years[3] of South Carolina’s general fund appropriations (FY13 to FY23) to general fund appropriations if limited to the rate of population growth plus inflation, with the following results:

​Key takeaways (see Table 2):

1. The FY23 budget was above the SCSB by $1.6 billion. When summing the budget differences for each year over the period, state appropriations were $9.6 billion higher than the SCSB.
2. Appropriations grew by 69.9% from FY13 to FY23. If limited to the rate of population growth plus inflation, appropriations across the same period should have increased no more than 42.2%.
3. By not following the SCSB over this period, individual taxpayers carry an additional tax burden of about $300 for the FY23 budget, or $1,200 for an average family of four. But considering the cumulative $9.6 billion difference since FY13, individuals are paying almost $1,800 more while families of four face an additional burden of nearly $7,200.

​Follow the sustainable budget
As legislators begin working on South Carolina’s next budget, we strongly encourage them to follow the SCSB, which establishes a spending limit based on what the average state taxpayer can afford to pay for government services. The SCSB does not instruct lawmakers how to spend funds, rather its purpose is to keep overall spending from rising too quickly.

Such budgetary restraint will be vital going forward. In its November 2022 report, the S.C. Board of Economic Advisors forecasted $12.3 billion in general fund revenue for FY24, with expected revenue for FY23 being $12.5 billion – a 1.3% decline. Moreover, the FY23 revenue estimate is 8.7% less than actual revenues of $13.7 billion for FY22. If these estimates materialize, it will mark an end to years of major growth in state revenue collections.

The good news is that South Carolina is already taking steps to prepare for a rainy day. Voters recently approved two amendments to increase contributions to the state reserve funds – raising the General Reserve Fund from 5% to 7% and the Capital Reserve Fund from 2% to 3% of the previous year’s general fund revenue. By law, the reserve funds act primarily as a shield against year-end budget deficits.

By doubling down on smart policy and following the SCSB, our state will be in a much stronger position to cut taxes, avoid the tremendous cost of unchecked government growth, and allow citizens to prosper and reach their fullest potential.

​Originally posted by South Carolina Policy Council.