Reframing the Tax and Budget Debate

From being one of principal architects of the 1986 tax reform while at the U.S. Treasury, to his presidency of the National Tax Association, to his leadership and service on countless boards and policy advisory committees it is difficult to identify an area of tax and fiscal policy where our annual meeting luncheon speaker, Dr. Eugene Steuerle, has not left his fingerprints.  In his luncheon address highlighting the fiscal challenges future spending commitments have created for all governments, the Richard B. Fisher Chair at the Urban Institute, Institute Fellow, and Co-founder of Urban Brookings Tax Policy Center argued the way we frame and present these issues can make a difference.

Steuerle began by noting we’ve gone so far down the road in establishing agendas for the future that voters have no flexibility unless they renege on promises made to them.  It’s not a function of austerity; we are richer than we ever have been.  But austerity is being confused with inflexibility and lost opportunity.  The consequences are real and stark including growing deficits, lack of flexibility during economic downturns, and lack of physical and social investment in children.  No less important, it becomes exceptionally difficult for legislators to innovate.  At the same time fiscal democracy has been eroded – citizens can no longer vote on what to do with their tax dollars.

This condition is relatively new; for most of our nation’s history, spending was highly discretionary and government reported surpluses well into future.  While most everyone is aware of the federal debt, most legislators and citizens do not appreciate how much flexibility to allocate resources based on current priorities and needs has been taken away from them.

The nature and sources of the problem are well-recognized – Medicare, Medicaid, Social Security, tax subsidies, pension subsidies, and interest on the debt.  By 2035, he noted, it is estimated that one-third of the adult population will be retired for one-third of their adult lives.  A typical couple with an average wage of about $50,000 retiring in 2015 is being promised about $1 million in Medicare and Social Security benefits.  For millennials retiring 35 years later, the number is about $2 million in senior-related promises – leading to cuts in education supports and other areas of government needed to increase productivity, growth, and mobility to pay for these obligations.  The result is a budget for a declining economy.

How do we start to turn this ship?  Steuerle argued it begins with presenting budgets in a way that better communicates the story that is unfolding by documenting the changes in revenues and spending over time on a real, rather than a nominal, basis.  He demonstrated the applicability of this approach by applying the methodology to the most recent federal budget debate, which showed that 150% of the increase in revenues was functionally committed before Congress did anything.  Such an approach, he argued, makes clear “what is getting squeezed today.”  He noted such an analysis is a bit more complicated at the state level because states do not have a classification of “mandatory spending” like the CBO does at the federal level.  However, the Urban Institute is currently developing a taxonomy to facilitate this type of analysis at the state level.  In summary, it’s a way to bring to bring budgetary trade-offs to light while holding legislators accountable for the total changes that are taking place, not just changes that are being proposed.

With an expected sizable state budget surplus forthcoming, these issues might seem less applicable to us.  But buried in the numbers in the forecast from the last biennial budget session, the 28% health and human services piece of the general fund budget was projected to consume nearly 60% of all the new revenue available to the state.  In addition, while we know what we do contribute to pension plans, a recalculated budget analysis based on what we are supposed to pay for these commitments would likely tell an interesting story.  An “opportunity cost” perspective on the state budget is no less relevant for Minnesota.  It piques our own interest and we look forward to working with these ideas in anticipation of the 2019 legislative session.