Systemic Budget Reform, Part 1: HB172

As of this morning there are 215 bills on the House side and 132 bills on the Senate side. With a total of 347 bills we are drawing closer to that 500-bill session that some people have predicted.

So far, I have done three reviews of the bills filed - there will be more to come - and I still urge attention to the tax-hike bills HB 64, 66, 67 and 68 on the House side, as well as SF16 on the Senate side. 

In addition, there are two bills I would like to draw attention to. These are of particular interest because of their focus on systemic changes to our state government budget:

  • HB 126 wants to create a "revenue recalibration task force" to basically design a new tax system for our state; and
  • HB 172, the purpose of which is to create a spending stabilization mechanism.

It would be smart of the legislature to review these two bills in one package. A recalibration of our tax system is pointless without reforms to spending; spending reforms greatly facilitate tax reforms. 

The best approach is, of course, to lead off with structural spending reductions, which are not proposed in HB172, but while we continue to wait for fiscal courage to find its way into the layers of lawmakers, a budget stabilization mechanism is at least a step in the right direction.

One could say that HB172 introduces a TABOR - Taxpayers' Bill of Rights - in Wyoming; based on how TABOR has failed in Colorado, I am generally critical of importing it here. However, HB172 is still the best spending-reform effort thus far in the 2019 session, making it worth the while. Here are the highlights of the bill:
Notwithstanding W.S. 9‑2‑1013(d)(ii), the governor's budget recommendations for each biennial budget period shall not exceed the actual revenues credited to the general fund during the previous biennium plus inflation; 
The ambition here is good: never spend more money than you have in current revenue. This formulation would put an end to the destructive practice that our legislature has fallen into, where it simply keeps appropriating money when it has run out of tax revenue, backfilling it with whatever our state's large investment portfolio can provide. 

There is just one problem here, a problem that this bill shares with the Colorado TABOR: it only applies to the General Fund; as I have explained before, the General Fund only accounts for one third of total state spending. By limiting the revenue-based appropriations clause in this way, HB172 incentivizes the legislature to re-route spending through Other Funds - just as they did in Colorado.

Back to the bill:
Expenditures shall be made using a zero-based budgeting process as determined by the legislature that establishes a zero-based budget for each agency at least every five (5) years;
Not a bad idea, but given that this whole budget-stabilization mechanism only applies to the General Fund, the zero-based budgeting provision appears to be restricted in the same way. 
The maximum annual percentage change in state fiscal year spending shall not exceed inflation in the prior calendar year plus three-fourths (3/4) of any positive percentage change in state population in the prior calendar year. Any negative population change shall not reduce the maximum spending limit under this subsection. Population shall be determined by annual federal census estimates and the population shall be adjusted every decade to match the federal census; 
It is a good idea to try to find an "anchor" for spending growth in some external variable. However, population growth is not the right way to go. It assumes that whatever population growth we have will come with a growth in the tax base similar to what our state already has. For example, suppose we have 500,000 people in our state who generate a revenue base of $5 billion. Then we get 25,000 new residents who are all dependent on government welfare. By the population-growth mechanism in HB172, the state can now grow spending by 4.25 percent.

While this population-growth example is stylized, it illustrates a problem in the bill. The other restriction on spending - past tax revenue - could prevent a spending increase if the population increase comes without a growth in the tax base, but what if last biennium was a particularly good year? What if there was a temporary surge in severance tax revenue?

Over time, the past-revenue and population-growth mechanisms should stabilize spending, but they are unnecessarily complicated for the purpose the bill is trying to fill. The underlying problem is, namely, that the state still has all its spending programs, all its entitlements, in place and therefore the same list of promises to us the people of Wyoming. The fulfillment of those promises requires a certain growth in spending regardless of how tax revenue evolves over time.  

I will have to return in a later article to the difference between this kind of "keep the promises" government and one that has been subjected to structural spending reform. For now, let us get back to HB172:
One hundred percent (100%) of any surplus annual funds after the spending limits under paragraph (iii) of this subsection are met shall be distributed as determined by the legislature as follows: At least eighty‑five percent (85%) of the amount available under this subparagraph shall be deposited in the legislative stabilization reserve account; and Not more than fifteen percent (15%) of this amount shall be placed in the permanent Wyoming mineral trust fund or the common school account within the permanent land fund.
A small technical note: there might a little bit of coordination to be done between this provision and SF5, which repeals the Budget Reserve Account

I would recommend the sponsors of this bill to simulate a business cycle and how this bill would work over its entirety. It would be good to know how it plays out through an up- and downswing in both our state GDP and tax revenue. I would recommend two assumptions: population increase and population decrease. The latter is of particular importance, as we as a state have lost population in recent years. 

This type of simulation would allow the bill sponsors to test the solidity of the mechanisms they have included. The only caveat is that it would have to take place under our current tax system; there can be no coordination with any outcome of HB126. That is not necessarily a bad idea: the legislature should make spending reforms before addressing our tax system. That way, a tax reform will not be focused on revenue maximization, but on forming a tax system that supplies an existing government with adequate revenue.

More on HB126 in the next part of this article. 

No comments:

Post a Comment

Weekly Economic Review

Our lawmakers here in Cheyenne are planning to raise taxes on the tourism industry - by a lot. In the meantime, the first issue of my new w...