SPEAKERS CONTENTS INSERTS Tables
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H.J. RES. 62—PROPOSING AN AMENDMENT TO THE CONSTITUTION WITH RESPECT TO TAX LIMITATION
TUESDAY, MARCH 18, 1997
House of Representatives,
Subcommittee on the Constitution,
Committee on the Judiciary,
Washington, DC.
The subcommittee met, pursuant to notice, at 9:37 a.m., in room 2237, Rayburn House Office Building, Hon. Charles Canady (chairman of the subcommittee) presiding.
Present: Representatives Charles Canady, Henry J. Hyde, Bob Inglis, Ed Bryant, Bob Goodlatte, Asa Hutchinson, Robert C. Scott.
Staff present: Kathryn Lehman, chief counsel; Brett Shogren, staff assistant; and Perry Apelbaum, minority chief counsel.
OPENING STATEMENT OF CHAIRMAN CANADY
Mr. CANADY [presiding]. The subcommittee will be in order.
House Joint Resolution 62, introduced by Congressman Joe Barton of Texas, would require a two-thirds vote for any bill that increases the internal revenue by more than a de minimis amount. The super-majority requirement would be waived when a declaration of war is in effect, or when both Houses pass a resolution which becomes law, stating that the United States is engaged in military conflict which causes an imminent and serious threat to national security.
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The amendment authorizes Congress to enforce and implement the article through legislation. The House voted twice in the 104th Congress to amend the Constitution to require a super-majority to raise taxes; once, as part of a vote on the Balanced Budget Amendment, and most recently, last April, on a free-standing tax limitation constitutional amendment, similar to the one we are considering today.
There are 10 instances in which the Constitution already requires a super-majority vote. Fourteen States have some form of super-majority requirement for raising taxes, and 13 additional States have introduced legislation to require a super-majority vote to increase taxes.
It will be helpful for us, in the course of this hearing, to examine the impact these provisions have had in the States as we consider the need for a Federal tax limitation amendment.
I want to thank each of the witnesses for coming today. I look forward to hearing their testimony.
Mr. Scott.
Mr. SCOTT. Thank you, Mr. Chairman.
This is the fourth hearing we've had on a proposed constitutional amendment this session. In light of the subcommittee's willingness to consider new constitutional amendments, I would like to submit for the record an opinion piece, written by Norman Ornstein entitled, ''The Fix of Last Resort.''
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Mr. SCOTT. He is a resident scholar with the American Enterprise Institute, and he cautions Congress against being overzealous in its attempts to amend the Constitution. In particular, Ornstein, warns of the dangers in needlessly amending the Constitution.
I have some very serious concerns about the constitutional amendment of this week, H.J. Res. 62: the Proposed Amendment to the Constitution with Respect to Tax Limitations. My concerns are not objections to my colleagues' attempts to limit new taxes; all Members of this Congress should be asking themselves whether or not our tax system is fair and appropriate. In fact, our Ways and Means Committee has a responsibility of addressing these complex issues in great detail. The end of limiting new taxes, however, is not the issue here, but rather the issue is a means which is impractical and counterproductive that I have concerns.
Mr. Chairman, I'll just submit the rest of my statement for the record and——
Mr. CANADY. Without objection.
Mr. SCOTT. So we can hear—because it goes on for a little time. And I might take Charlie's time if I finish my statement. [Laughter.]
Mr. CANADY. All right. On our first panel today, we will hear from our colleague, Congressman Shadegg. Congressman Shadegg is in his second term representing the fourth district of Arizona. He has been a leading advocate for reduced Government spending, a balanced budget, and the reestablishment of State and individual rights. He is testifying for himself and on behalf of the sponsor of the amendment, Congressman Barton, whose commitments in his district kept him from joining us this morning.
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We want to welcome you, and we appreciate your being here. Without objection, your full statement will be made a part of the record. Mr. Rengal was scheduled to be here, but apparently will be unable to join us this morning. So, if you would proceed, Representative Shadegg.
STATEMENT OF JOHN B. SHADEGG, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ARIZONA
Mr. SHADEGG. Thank you, Mr. Chairman.
Let me begin by thanking you and the members of the committee for holding this hearing, for taking your time to be here, and for allowing me the opportunity to appear before you.
I believe this legislation is, in fact, critically important. It's a measure designed to restore some level of discipline to the Federal Government, where much of the discipline originally imposed on the Federal Government has been eviscerated by the U.S. Supreme Court.
Firstly, focus on the issue of taxes and the problem we face. John Randolph, who served as a Member of this House, and also as a Member of the U.S. Senate, between 1773 and 1833, I believe, stated it well. Contemplating the power of Government, he once observed, ''It has been said that one of the most delicious of privileges is that of spending other peoples' monies.''
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Well, I think he was right, but regrettably, that privilege has been abused. The plain truth is that for the past 40 years or more, the size and scope of the Federal Government, and the tax burden that it imposes, has increased in good years and in bad years, year-in and year-out, under Republican Presidents and Democrat Presidents, regardless of which party controlled the Congress.
In the decade of the eighties, which it was seen as an anti-Government growth decade. Government, nonetheless, and the size of taxes grew by 20 percent. Why did this occur? I think, is a fair question that we should ask ourselves. I think the answer comes readily to the forward. It is, because the constitutional limits imposed on this Government have been in many ways read out of the Constitution by the U.S. Supreme Court, or at least limited in their stricture. And in the absence of those structural limits on the size and scope of the Federal Government, the natural pressure is to spend, and the natural pressure then is to tax to support that spending.
The premise which this amendment raises is absolutely straightforward, a straightforward issue of fiscal responsibility. Should the Congress be more responsible about spending the hard-earned dollars earned by its citizens, and increasing the tax burden we already impose on those citizens, or should it not?
If you believe we should be more reasonable about increasing that tax burden, then this amendment deserves your support. By making it somewhat harder to raise taxes, we will force Congress to have a higher level of discipline.
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I think it's important to note that this measure does not make it impossible to raise taxes. It is not a straitjacket. What it does is raise the bar.
Recently, George Will wrote, that ''A constitutional amendment should be thought through carefully,'' and I note that the ranking member, Mr. Scott, raised some objection to the issue of amending the Constitution, yet, one more time. In his discussion, George Will wrote that, ''In contemplating a constitutional amendment, one ought to look at whether or not the amendment restores the original intent of the Founding Fathers.''
I would suggest that this amendment does precisely that; that because of the reading of the U.S. Constitution in a broader sense, the essential elimination of the restrictions put on this Congress by the commerce clause, since those now are largely gone as a result of Supreme Court decisions, we need to find new discipline.
And I think it's also important to understand that we are not talking about restricting the ability to raise Government revenues, at least at the level they currently are. We are not putting Government in a straitjacket, saying it cannot have the revenues to do its job. What we are saying is that we want to simply raise the bar slightly for additional tax increases, for new tax burdens imposed on the American people.
The chairman referred to the number of States that have similar measures in their Constitutions, and the experience, to some degree, of those States. In 1992, I chaired a ballot initiative in Arizona called Proposition 108. It was adopted by a vote of 72 percent of the voters in Arizona, and imposed a constitutional requirement that there be a two-thirds majority in the Arizona legislature for future tax increases. That measure has been tremendously successful. In the eight—in the nine years preceding the adoption of that measure, Arizona had increased taxes in eight of nine consecutive years. Since it's passage, we have not raised taxes even once, but the growth of our economy has been tremendous. Arizona now has a dynamic and strong economy which replaced a weak economy.
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Former United States Supreme Court Chief Justice, Jonathan Marshall, once wrote that, ''The power to tax, is the power to destroy.'' He wrote those words before the Civil War, at a time when the role of the Federal Government in our society was radically different than it is today. Given this change in the role of the Federal Government, given the clear expansion of our power and our authority, this amendment, I would argue, is a necessary and reasonable reform. The Government's power to tax has indeed become, quite literally, the power to destroy.
The tax burden on the American family has grown radically. We haven't balanced the Federal budget since 1969. If passed, this measure would at long last level the playing field for America's taxpayers.
Since 1969, spending by the Federal Government has nearly doubled in constant 1987 dollars—from $590 billion, to an estimated $1.186 trillion in 1996. In 1995, the amount of taxes a two-income family paid, as a percentage of income, rose to a record high of 38 percent. Clearly, this illustrates that it is now much easier to raise taxes than to make the tough decisions about spending.
I urge you to join me in passing this amendment. I appreciate the time extended to me and would be happy to answer to your questions.
[The prepared statement of Mr. Shadegg follows:]
PREPARED STATEMENT OF JOHN B. SHADEGG, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ARIZONA
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Mr. Chairman, as a chief sponsor of the Tax Limitation Amendment (H.J. Res 62) in the House, I want to thank you and the members of the Subcommittee for holding this important hearing today. I would also like to thank you for the privilege of appearing before you today.
The legislation before the committee today is a constitutional amendment requiring a two-thirds vote in each house to raise taxes. This measure is an attempt to return some discipline to the federal government where much of the discipline imposed by the founding fathers in the Constitution no longer exists.
John Randolph, who served as a Member of this House and as a Member of the Senate between 1773 and 1833, contemplating the power of government once observed:
''It has been said that one of the most delicious of privileges is that of spending other peoples' money.''
Regrettably this privilege has been abused.
The plain truth is that for the past 40 years or more, the size and scope of the federal government and the tax burden imposed by the federal government on Americans has grown, year in and year out, in good times and bad, under Republican and Democrat presidents, regardless of which party controlled Congress. In the decade of the 80's government and taxes grew by 20%. Why? Because the Constitutional limits imposed on the federal government have been read out of existence and in the absence of those limits there is a natural bias in our system toward growing our federal bureaucracy.
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The premise which this amendment raises is a straightforward issue of fiscal responsibility. Should Congress be more responsible about spending the hard-earned dollars earned by the citizens of this great country and increasing the already heavy tax burden we place on those citizens? If you believe it should, then you should support this amendment. By making it slightly harder to raise taxes in America, we will force this Congress to have discipline.
In 1992, I chaired Proposition 108, a state-wide initiative in Arizona, which was adopted by a vote of 72%, imposing a constitutional two-thirds requirement for further tax increases. Arizona is one of eleven states which has enacted a two-thirds supermajority approval of a tax increase. Let me briefly explain why I fought for the Arizona initiative.
Former United States Supreme Court Chief Justice Johnathon Marshall once wrote: ''The power to tax is the power to destroy.'' He wrote those words before the Civil War at a time when the role of government was radically different than it is today. Given the size of government today, Justice Marshall's words ring true now more than ever.
The government's power to tax has become, quite literally, the power to destroy. The credit which is essential for American businesses has all but dried up as the government commands seventy-five percent of available credit to finance its spendthrift ways. Small businesses all across America—the lifeblood of our economy—have gone bankrupt in record numbers under the weight of excessive government taxation.
Given the U.S. Supreme Court's loosening of the Constitutional limits on the federal government, H.J. Res. 62, requiring a two-thirds majority to approve additional tax increases, is a reasonable and essential reform. In light of the radical change which has occurred in the role of government, this amendment will restore some discipline and reduce the ever-increasing pressure to tax and spend.
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We haven't balanced the budget since 1969. If passed, this measure will at long last level the playing field. Since 1969, spending by the federal government has nearly doubled in constant 1987 dollars, from $590 billion to an estimated $1.186 trillion in 1996. In 1995, the amount of taxes a two-income family paid as a percentage of income rose to a record high of 38%. Clearly, this illustrates that it is much easier to raise taxes than make tough decisions on reducing spending.
Since 1981, the House has passed five tax increases. Four out of the last five major tax increases—totaling $666 billion—failed to obtain the support of sixty percent in both Houses. Under a supermajority, the 1993 tax increase—the largest in American history—would not have passed. It is fair to say that the tax increase of 1993 did not even receive a simple majority since Vice President Gore had to cast the tie breaking vote!
I was sent to Congress by the fourth congressional district of Arizona to balance the federal budget by shrinking the size and scope of government, not raising taxes. I have watched Congress go down this same road before. Each time Congress has promised to cut spending, what has happened instead is that taxes have increased. The chronic budget deficit is because Congress spends too much, not because it taxes too little.
The effects of Arizona's Tax Limitation Amendment cannot be overstated. Prior to passage of Proposition 108 Arizona had raised taxes for eight out of nine successive years. Since passage of this Tax Limitation Amendment, taxes have not been raised and our economy, which had grown sluggish under a series of tax increases, is now booming.
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Mr. Chairman, Arizona's example is proof that the Tax Limitation Amendment will work, and it will improve the economy and make the nation better. I urge your support for its passage, and I'd be happy to answer your questions.
Mr. CANADY. Thank you, Mr. Shadegg.
I don't have any questions. Mr. Scott.
Mr. SCOTT. Mr. Chairman, I'd like to continue my statement, if I could——
Mr. CANADY. That's fine. [Laughter.]
Mr. SCOTT [continuing]. Rather than ask questions.
Mr. Chairman, the constitutional amendment of the week creates a super-majority; that super-majority is a voting procedure which is only appropriate and limited in defined sets of circumstances. The terms of the amendment are vague and likely to cause great confusion. This amendment would create power in a new bureaucracy or cede Congress' taxing powers to the courts. And, in fact,—and the fact that we have not been able to adhere to our own tax limitation rules should give us a fairly good idea of how problematic a constitutional amendment on tax limitation would be to this body.
There are very good reasons why super-majorities are rare in our Constitution. They're rare because the framers of the Constitution learned from their experiences, and the failed Continental Congress, that excessive super-majority requirements are not practical in an efficient Government.
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They're only required for actions such as overriding a presidential veto, impeachment, or proposing constitutional amendments to the States. These are well-defined circumstances, not open to debate. Deciding whether or not a bill will increase revenue, and therefore, invoke a super-majority requirement—the subject of so many different views—it will render the legislative process inoperable.
We have seen what happens when we let our legislative body fall prey to impractical tax limitation rules. In the 104th Congress, we had a rule that required a two-thirds vote on bills, or 60 percent vote on bills, involving Federal income taxes. The story of that tax limitation rules application in the last Congress is one of waiver, after waiver, after waiver, because many bills included changes in the tax system that would have been—that could have been classified as quote, ''tax increases.'' The rule was waived for the 1996 budget reconciliation report; it was waived for the Medicare preservation bill, and it was waived for the Health Coverage and Availability Act. Considering that in recent history no major tax changes, whether signed into law by Democratic or Republican Presidents, have passed both Houses with a two-thirds majority, the truth is that Congress cannot, and will not, function properly under such strident voting requirements. Even if the voting scheme was workable, we seem to have had very little grasp on its implications.
What constitutes an increase in revenue? Are we talking about cuts in corporate welfare that increase a corporation's tax base and even trade policies that will improve our export economy, and thus, in effect, increase revenue? A report, done by the Congressional Research Services, suggests that even a capital gains tax cut could be considered an increase in revenue, since it could lead to an increase in taxable activity, which at some point could increase revenue. I would hope that this is not a constitutional amendment to protect corporate loopholes or to prevent any positive change in the existing tax structure.
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Who will be anointed with the power to decide the answer to the golden question: does a particular bill constitute an increase in revenue? In last March's subcommittee hearing, we heard testimony that this power could be vested in a bureaucrat, with an unprecedented power to control the legislative powers in Congress.
Is it our intent to create another branch of Government, an independent higher office? In addition, the complex and subjective nature of economics makes it clear that any interpretation will be disputed. Who, then, becomes the arbitrator of such disputes? However one feels about the constitutional amendment, we should all be able to agree that there are too many questions about the current language that cannot be answered with any degree of certainty.
What types of activities, for example, constitute increases in the internal revenue? Who decides if a bill increases the internal revenue? What happens if there's a disagreement on the question of what constitutes revenue? Do the courts make the final decision? Who, if anyone, has standing to challenge the unconstitutional revenue increases? Does the constitution of a super-majority inadvertently vest excessive powers in the hands of the minority? These are just a few questions that we have to seek answers to today.
In amending the Constitution—amending the Constitution is serious business which should not be conducted haphazardly—some very tough questions must be answered, and I, therefore, look forward to the testimony of the witnesses.
And, finally, Mr. Chairman, I'd just like to say that, if anyone wonders how we got into the financial mess that we're in, you can only look at this kind of amendment that proposes a simple majority to spend the money, but a two-thirds majority to actually pay for the bills that we've already passed.
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I look forward to the additional witnesses, Mr. Chairman, and thank you for your indulgence.
Mr. HUTCHINSON [presiding]. Thank you, Mr. Scott for those comments. I want to recognize myself for a few questions. Mr. Shadegg, I want to tell you, I appreciate your testimony today and your leadership on this issue. I was interested in the experience that you've had in Arizona. You indicated you passed the tax limitation provision in Arizona, and I think that was at the two-thirds level?
Mr. SHADEGG. Three-fourths level.
Mr. HUTCHINSON. Three-fourths. Has there been any reduction in services by the State because of failure to properly fund programs and have the revenues needed?
Mr. SHADEGG. Mr. Chairman, I'm sorry. I misunderstood your question. First of all, you are quite correct, it does require a two-thirds majority for future tax increases.
And the answer to your question is, no, we have not had a reduction in services. Indeed, the effect on the Arizona economy, since the passage of that measure, and since we stopped the pattern of year-in and year-out enacting tax increases, has been to produce a very dynamic economy; an economy that is growing at a rapid pace; an economy that is growing at a dramatically stronger pace than the economy of some neighboring States, and therefore, is producing adequate revenues. Indeed, the State of Arizona has enacted tax cuts in, I believe, each and every year since we passed this measure, because we have had a strong stream of revenue into the Government. So, the answer is, we have not reduced spending, and I noticed Mr. Scott raised a number of questions in his statement, and I would be happy to address as many of those questions as he would like to put to me.
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But the final line, I thought, was the point with regard to how we'd get into the mess by requiring a simple majority to spend the money and a super-majority to raise the taxes to spend it. In point of fact, I'd like to say for the record, this doesn't do that. What it does is to recognize the fact that we already have a quite adequate economic structure and tax system in place. We are raising significant revenues in this Nation, and that revenue stream is growing each year. We aren't in a mess financially in this Nation because we don't tax sufficiently; we are in a mess because we can't control spending. And I think the proof of that lies in the fact that, when past Congresses have raised taxes, for every $2 they've increased taxes, they've spent, roughly, $3.
Mr. HUTCHINSON. Thank you. One other question that I was thinking of—H.J. Res. 62 provides, of course, for the two-thirds vote for increasing internal revenue. Now, I was thinking back to the airline user tax that had to be reinstated, and, as you know, that tax expired and had to be voted upon again by Congress. There was a number of taxpayer organizations that indicated they were going to score that as a tax increase. And because it was on the Suspension Calendar, I believe, it took a two-thirds vote to pass. And it was just noteworthy to me that, one, how this would fit under your proposed constitutional amendment, and the fact that it did acquire the two-thirds vote. Do you want to comment on that?
Mr. SHADEGG. Certainly, Mr. Chairman. First of all, I would note that I think a line is drawn in the language of this initiative, and I think it's—in this amendment—and I think it's very important to note that this language is different than the language that was before this subcommittee 2 years ago. The language that was before the subcommittee raised certain issues, which were then discussed with the Ways and Means Committee in the time intervening between this hearing and the floor action 2 years ago, and the language was revised. As a part of that revision, the words, ''an increase in the internal revenue'' were inserted. It is my understanding those words are intended to apply to taxes, but not to fees, that is, not to fees for a given activity.
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My understanding of the airline ticket tax, that we debated on the floor, as you point out, a little over a week ago, is that that was, in fact, a tax, and as you note, it passed on the suspension calendar with a two-thirds vote.
I would note that I believe five of the last six tax increases imposed by this Congress, it is pointed out by those of us who advocated this change, did not receive the required super-majority vote. One of them did receive that vote. I think that it proves two things: No. 1, that this Congress can, when there is a sufficient consensus, agree to a tax increase, and indeed pass it with a super-majority—your point about the airline ticket tax establishes, I think, the point equally, but the second point I want to make, is that just because the other five did not get the full two-thirds vote that would be required under this measure does not mean that no tax increase would have passed.
What I submit to you, and the other Members of the committee and the Members of the Congress who will debate this measure in the weeks ahead, and hopefully pass it on the 15th of April, is that it means we will have looked more carefully at those tax increases. We would have more carefully evaluated the need for them, and perhaps scaled them back, and obtained the level of support necessary for their passage. Again, simply inserting a slightly higher level of discipline before we, not have taxes, but raise taxes yet again.
Mr. HUTCHINSON. Thank you very much. I do believe that we need to have—just to express my personal point of view—a tax limitation provision in a Balanced Budget Amendment. I think that it could be three-fifths or two-thirds. I think you can debate the exact level, or hurdle, that you have to get over, but I think it is important to have a tax limitation. So, thank you, Mr. Shadegg.
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Mr. SHADEGG. Mr. Chairman, if I could simply, just quickly, conclude by adding a couple of points, as I am testifying on behalf of all of the original sponsors, including Mr. Barton—I want to point out there are over 117 co-sponsors of this measure at the present time. It is matched by Senate Joint Resolution 9, sponsored by Senator Kyl on the Senate side, which has, I believe, more than 19 sponsors.
I would also like to point out that there are a number of outside groups which have expressed their support. You have witnesses from at least two of those groups who will appear before you today: Citizens for a Sound Economy and the Heritage Foundation. With your permission, Mr. Chairman, and the consent of the committee, I would like to add to my testimony, a list of all of the groups that have, in fact, the outside groups that have expressed support for this provision.
Mr. HUTCHINSON. Without objection.
Mr. SHADEGG. Thank you, Mr. Chairman.
Mr. HUTCHINSON. Thank you, and at this time, if there's nothing further, we'll proceed to the second panel. We have in our second panel, Mr. Robert Greenstein, who I believe is coming forward. Mr. Greenstein serves as executive director for the Center on Budget and Policy Priorities.
Our next witness will be Dr. Barry Poulson, professor of economics at the University of Colorado. Dr. Poulson is the author of numerous books, articles, and monographs focusing on economic growth and development.
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And we again welcome Dean Samuel Thompson from the University of Miami's School of Law. Dean Thompson testified at our hearing on the tax limitation amendment last year, and we were pleased to have him back with us today.
Our next witness is Michael Rappaport. Professor Rappaport teaches at the University of San Diego School of Law. Among his many writings, he is co-author of a law review article on the constitutionality of super-majority requirements that was published in the Yale Law School Journal.
Our final witness will be Daniel Mitchell, who is the McKenna Senior Fellow in Political Economy of the Heritage Foundation. Joining us at a later time, we will have another witness on this panel, who will be introduced at that time.
Dr. Poulson, if we could start with you.
We welcome Mr. Bryant to the panel this morning.
So, Dr. Poulson.
STATEMENT OF BARRY W. POULSON, PROFESSOR OF ECONOMICS, UNIVERSITY OF COLORADO
Mr. POULSON. Thank you, Mr. Chairman. I'm speaking here on behalf of the National Tax Limitation Foundation today. We're conducting a study of fiscal discipline mechanisms in the States. I'd like to talk about what we've learned about the effect of fiscal discipline in the States and its implications for the proposed legislation.
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A fatal flaw emerged in fiscal policy at all levels of Government back in the 1960s and seventies. The flaw was hysteresis. The effects of inflation in expanding the levels of Government spending and taxes continued over into the 1980s and the 1990s, even in this period of less inflation in the economy. We think that we've begun to solve this problem at the State level, but a solution at the Federal level remains elusive.
The solution at the State level was a tax revolt beginning in the 1970s. In the late seventies, Colorado and 22 other States passed tax and spending limits to attempt to constrain the growth of government at the State and local level. Our research shows that the initial impact of these tax and spending limits did, in fact, constrain the growth of government in the late seventies and early eighties, but by the mid-1980s, State government spending and taxes was, again, increasing above the limits imposed by these fiscal discipline mechanisms.
And so, for the last decade what's happened is that taxpayer groups have searched for more stringent fiscal discipline mechanisms to attempt to constrain the growth of State and local government. They've attempted to incorporate these more stringent fiscal discipline mechanisms in the form of tax and spending limits that are designed more stringently; they require voter approval to increase taxes at any level of government. They require super-majority votes to exceed these limits, and they include some sanctions when governments do exceed these limits.
This bottom-up approach to fiscal discipline has proven to be very effective. At the same time, State legislators also attempted to introduce more stringent fiscal discipline mechanisms into our State constitutions and statutes. These fiscal discipline mechanisms include a much broader range of discipline devices, not only tax and spending limits, but also super-majority votes to increase taxes, and budgetary procedures, such as rainy day funds, program evaluations, sunset provisions, and tax indexation.
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Our analysis shows that when these fiscal discipline mechanisms are incorporated in the constitution, they act to more stringently constrain the growth of government, more so than if these discipline mechanisms are statutes. In Colorado, for example, our experience is very similar to the experience in Arizona that you just heard in previous testimony. It's very interesting because the fiscal discipline mechanism imposed by our State legislature, a 6 percent limit on the growth of taxes and spending, now effectively binds the growth of government at the State level. But at the same time, our constitutional constraint, passed through citizens' initiative and referendum, is constraining the growth of government at the local level, and projections are that our constitutional constraint will also limit the growth of government at the State level over the next few years.
Colorado has a super-majority vote, requiring two-thirds vote of Congress to raise taxes. Fourteen States, as you know, also have the super-majority vote. In the last year, 13 States have—additional States—have introduced this super-majority vote requirement.
In the economics literature, there's a substantial debate about the relative effectiveness of super-majority votes compared to these other fiscal discipline mechanisms that I've talked about. However, there's no doubt, in the economics literature, about the impact of these fiscal discipline mechanisms, as a whole, at the State level. Our experience in Colorado is very similar to that in Arizona, and indeed, in all of the tax and spending limit States; 22 States have these kinds of disciplines imposed. In these States, the government has grown less rapidly in the period after they have been introduced. The economy in these States is prospering, growing more rapidly than in non-tax and spending limit States. States like Colorado are attracting business and industry; our jobs are growing; employment is growing. In fact, in Colorado at this point, our revenue base is growing at a level that exceeds the limit. Those funds are now going into a rainy day fund. If they continue, legislators of Colorado are required to return some of this tax revenue to taxpayers which is, of course, what the intent of these fiscal discipline mechanisms was designed to do.
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What's the implication of our experience with the States for the Federal Government? I think the first point to make is, it's going to be much more difficult to impose this kind of fiscal discipline at the national level, because there is no fiscal constitution in National Government. There is no balanced budget provision; there are no limits on debt; there are no constraints on taxes and spending. The proposed amendment to the Constitution could be a crucial part of a fiscal discipline mechanism at the Federal level, as it is at the State level. I think that the possibility is that tax and spending limits will need to be imposed, as well as super-majority voting requirements to increase taxes for this kind of fiscal discipline to work at the Federal level.
The kind of shock therapy that we've introduced to the States is going to be much more difficult to impose, if for no other reason, than the Federal Government has been at this process of expanding inflationary increases in spending for 40 years, rather than 20 years. So, the Federal Government is about two decades behind the learning curve of the States in learning how to constrain this kind of growth in government.
We don't know what the path to fiscal discipline will be at the Federal level; our experience with the States is that it's likely to be both a bottom-up approach; 29 States have now passed a resolution requiring, or calling for, a constitutional convention to balance the budget. My expectation is that such a convention would, in fact, include the kind of discipline that we're discussing today: tax and spending limits, super-majority vote requirements, and voter approval to increase taxes. But in the meantime, there's no reason for the Federal legislators not to pursue fiscal discipline in terms of a top-down approach.
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The super-majority voting provision to increase taxes can be an important part of a broader set of constitutional provisions, including a balanced budget, limits on taxes and spending, and requirements for voter approval for new taxes. But the super-majority provision may also stand alone to effectively constrain increased Federal taxation.
[The prepared statement of Mr. Poulson follows:]
PREPARED STATEMENT OF BARRY W. POULSON, PROFESSOR OF ECONOMICS, UNIVERSITY OF COLORADO
I want to thank you for inviting me to testify before you today. Super-majority requirements to increase taxes are part of the fiscal discipline mechanisms that exist in a number of states to constrain the growth of government. We are conducting a study of state fiscal discipline mechanisms to determine why they were adopted, and what impact they have had on state and local finance. The study was commissioned by The National Tax Limitation Foundation. I will report on the findings from our study and the implications for the proposed constitutional amendment requiring a two-thirds vote in each house of Congress to raise taxes.(see footnote 1)
A fatal flaw emerged in fiscal policy at all levels of government with acceleration of inflation rates in the 1960's and 1970's. The shock of double digit inflation increased the level of taxes and spending in a sharp and discontinuous way, increasing the share of government in national income. This expanded role for government in the economy has continued in the less inflationary economy of the 1980's and 90's. The problem is one of hysteresis or inertia in which taxes and spending continue to ratchet up at the higher levels. It is fair to say that we have begun to solve this problem at the state and local level, but a solution at the federal level remains elusive.
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At the state and local level it was clear that fiscal constitutions limiting the growth of government were not working. Most states had constitutional or statutory provisions for a balanced budget and debt limits, but these traditional fiscal discipline mechanisms failed to constrain the rapid growth of government. Beginning in the late 1970's most states experienced a taxpayer revolt. Twenty-two states have introduced tax and spending limits and property tax limits. This kind of shock therapy proved to be an effective remedy to hysteresis in fiscal policy. Our research shows that tax and spending limits significantly slowed the growth of state spending in a number of states in the late 1970's and early 1980's.(see footnote 2) However, by the mid-1980's spending was again increasing more rapidly than income in these states. Inflationary expectations proved very difficult to overcome when built into fiscal policy decisions over several decades. Legislators responding to pressures from different rent seeking groups chose to ignore or evade the constraints imposed by these tax and spending limits.
The problem from a taxpayer perspective was how to design fiscal discipline mechanisms that could effectively constrain this growth of government. Over the last decade taxpayer groups in a number of states have found a solution in more stringent fiscal discipline mechanisms. New tax and spending limits have been introduced requiring voter approval to raise taxes, supermajority vote requirements for the legislature to exceed tax and spending limits, and sanctions on government officials that violate these limits. This bottom up approach to fiscal discipline has been especially important in states which provide for citizen initiative and referendum to incorporate fiscal rules in their constitution.(see footnote 3)
Partly in response to this taxpayer revolt, state legislators also launched a top down approach to fiscal discipline. These include constitutional and statutory limits on the growth of taxes and spending; super-majority vote requirements to increase taxes; and budgetary procedures such as rainy day funds, program evaluation and sunset provisions, and tax indexation. Our analysis shows that when these fiscal discipline mechanisms are incorporated in the constitution they are more likely to constrain the growth of government. Statutory provisions are often perceived as less stringent constraints that can be ignored or evaded by legislators. Nonetheless, this top down approach to fiscal discipline imposed by legislators often complements the bottom up approach from taxpayer initiative.
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In Colorado, for example, a statutory limit of 6% on the growth of state spending now effectively limits the growth of state government. At the same time the constitutional tax and spending limits imposed through citizen initiative and referendum now constrain the growth of local government; and it is projected that this constitutional limit will constrain the growth of state government as well over the next few years. Voter approval is required for any increase in taxes at all levels of government. The legislature can increase taxes in a temporary emergency, but this requires a two-thirds vote of both houses.
The following table shows that fourteen states now require a super-majority vote to raise taxes, and thirteen states have introduced this legislation.
In Colorado, for example, voters have rejected a proposed state sales tax increase earmarked for education; and at the local level proposed tax increases are defeated about as often as they are approved. The result has been a growth of government at both the state and local level based on voter approval. The more stringent fiscal discipline mechanisms have broken the hysteresis that used to dominate our fiscal decisions. With a hard budget constraint rent seeking groups must battle for the limited revenue available, and legislators must make the difficult decisions involving tradeoffs between government programs. This not only keeps the growth of state and local spending in line with the states economy, it tends to shift the composition of spending toward government programs that expand the productive capacity of the economy. States like Colorado that have imposed fiscal discipline have experienced more rapid rates of economic growth compared to states that have failed to do so. These states are attracting new business investment, jobs, and population from states with unconstrained growth in government. As a result of this prosperity in Colorado, the growth of the tax base and government revenues now exceeds the tax and spending limit. At present these funds are going into a rainy day fund. If revenues continue to increase at this pace legislators will be required to return some of those funds to taxpayers.
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As part of our study we are surveying state legislators in each state for their perspectives on the impact of fiscal discipline mechanisms on state and local finance. The new fiscal discipline mechanisms have widespread support among the legislators that we survey. However, one of our legislators from Colorado argued that fiscal discipline mechanisms may tie the hands of the legislature too much. He argued that legislators are unwilling to cut taxes in the current period of prosperity because they do not think that voters will approve tax increases in the future, and the legislature will be unable to secure the super-majority vote required for temporary tax increases. This reaction reveals the extent to which we continue to be trapped by inertial expectations of the past. First, there is nothing preventing legislators from giving taxpayers a temporary tax rebate as they have in the past, without permanently reducing tax rates. Secondly, when the economy falls into a recession the rainy day fund helps to finance spending in a period of falling revenues. Colorado has been able to avoid the boom bust cycle experienced by other states largely due to the effect of tax and spending limits in smoothing government spending over the business cycles of the 1990's. Finally, it is difficult to perceive the legislature as unable to respond to a true emergency with the two-thirds vote required to temporarily raise taxes, given the ease with which they increased taxes and spending in the recession of the mid-1980's.
We have learned a great deal about fiscal discipline at the grass roots level, and this knowledge should inform the debate at the national level. The problem of hysteresis, breaking the inertia of expanding government taxes and spending, is more difficult at the federal level than the state level. In the absence of balanced budget requirements and debt limits the federal government operates with a soft budget constraint that permits rent seeking groups to expand the growth of federal spending in excess of the growth of national income. However, the shock therapy that has proven successful in breaking hysteresis in fiscal policy at the state level can do so at the federal level as well.
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The proposed constitutional amendment to require a super-majority vote in Congress to raise taxes is an essential part of the fiscal discipline mechanisms required to constrain the growth of the federal government. It is not enough to balance the federal budget; effective constraints will require limits on the growth of taxes and spending, and rules that suspend these limits only in emergencies. Legislators must perceive these rules as binding constraints, and that is most likely to happen when they are embodied in the constitution rather than as statutory limits subject to the discretion of Congress.
The experience of the states suggests that over time there will be several different paths to fiscal discipline in the federal government. It is now almost two decades since Colorado introduced the first tax and spending limit. The more stringent tax and spending limits introduced in 1992 emerged after a decade of failed attempts by legislators before they finally passes a new statutory limit; and after a decade of failed attempts by citizens before they finally passed a new constitutional limit through the referendum process. No one could have envisioned that these two approaches to fiscal discipline, statutory and constitutional, would complement each other in the way they now do to constrain the growth of our state and local government.
We should expect the path to fiscal discipline at the national level to be even more lengthy and complex because there is now no federal fiscal constitution. A bottom up approach to fiscal discipline at the national level is of course already underway. Twenty nine states have passed a resolution calling for a constitutional convention to balance the federal budget, and more states have introduced a balanced budget resolution this year. A constitutional convention accompanied by a thorough national debate and referendum may be the best way to achieve a consensus and to formally incorporate a balanced budget provision in the U.S. Constitution. We would expect such a balanced budget provision to be accompanied by other fiscal discipline mechanisms now contained in state constitutions, including tax and spending limits, voter approval to raise taxes, supermajority vote to exceed these limits, and sanctions that would assure enforcement of the limits. But amending the U.S. Constitution through a constitutional convention has proven to be a lengthy and difficult process.
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In the meantime there is no reason for federal legislators to not pursue fiscal discipline as their state counterparts have. The most effective path to fiscal discipline is not clear, but given the limited success of Congress in imposing fiscal discipline through statutory limits on taxes and spending, there is every reason to push for constitutional limits such as that embodied in the proposed legislation. The super-majority provision may become part of a broader set of constitutional provisions including a balanced budget, limits on taxes and spending, and requirements for voter approval for new taxes. But the super-majority provision may also stand alone to effectively constrain increased federal taxation.
Mr. HUTCHINSON. Thank you very much, Dr. Poulson.
I want to recognize a new member of the panel that's just joined us, the honorable James C. Miller III, counselor to Citizens for a Sound Economy. Mr. Miller served as Director of the Office of Management and Budget during the Reagan administration. We're delighted to have you with us today, and thank you for coming here.
And next, we have Robert Greenstein, who I introduced previously. Mr. Greenstein is the executive director for the Center on Budget and Policy Priorities. We welcome you gentlemen and we'll just go back to the order that we had started with. So we'll turn to you, Jim, if you would present your testimony, and we look forward to it.
STATEMENT OF JAMES C. MILLER, COUNSELOR, CITIZENS FOR A SOUND ECONOMY
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Mr. MILLER. Thank you, Mr. Chairman. I have the great benefit of having not one, but two members of Congress on this panel today from my State of Virginia, so I'm particularly honored.
I am pleased to testify on behalf of this tax limitation amendment. What's the problem? The problem is that taxes are too high. There's an increasing body of literature that shows that we, as a Nation, are paying an enormous cost in terms of economic growth, well-being for our children and grandchildren, because Government is so large. Much of this Government largess is rooted in very sincere empathy for the poor, but a lot of these distributional programs have short-term advantages, but hurt them in the long-term.
There's waste in Government, and there are ways of reducing total Federal spending. Basically, the problem is, in my judgment, Government is too large a fraction of all our lives. There are various ways of addressing the problem's root. The problem is created, because, in our representative democracy, the way the decisionmaking process works, is that there is a bias toward ever larger Government, to ever higher taxes. However, taxes were not always as high as they are today. For most of our country's history, Federal, State and local taxes were a very small portion of the Gross National Product; these were the years when the country grew fastest—faster than it's growing today. When you have a basic infirmity in the decisionmaking process, the only way to address that is to change the governing Constitution, and that's what the tax limitation amendment would do, and I urge you to move favorably on this.
I have in my written testimony, I submit for the record, a number of suggestions. First, I want to point out that it's inherently more difficult to apply a tax limitation amendment than it is to apply a Balanced Budget Amendment. I was never taken very much by the argument that you wouldn't know whether the budget was really balanced; were you running a surplus or deficit? It's very simple. The Federal Government's like a bank teller; the deficit is the difference between the amount of money that comes in and the amount of money that goes out; it's that simple. Tax limitation amendment would be applied, though, on the basis of estimated effects, and let's not kid ourselves, even the experts on this panel would disagree over the effects of a tax proposal, and of course, there would be ample opportunity for demagoguery on the part of interested parties.
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Second, the amendment, I note, applies only to internal revenue; it leaves out tariffs and duties, and also, offsetting receipts. I think that's a mistake; I would encourage you to include all, because that gives an incentive for Congress to heighten, to raise duties and tariffs and that would be very bad for our economy. Offsetting receipts are billions of dollars, and they can easily be expanded.
And third, let me suggest you take out the ''de minimis'' language. I don't know whether this is a suggestion of Republicans or Democrats; frankly I think it's kind of silly. What you say is you can't increase taxes, but you can increase them one-tenth of 1 percent. I mean, just say no increase or say one-tenth of 1 percent.
The fourth, let me suggest that you judge the effects in present value over the complete future, not just the 5 years, because that gives an incentive for Congress to backload the tax effects. I remember, frequently, being in the Oval office with President Reagan, and Members of Congress would come down and say, ''Mr. President, this budget—this reconciliation bill has no tax increase.'' And that was true for the coming Fiscal Year, but there were tax increases all through the out-years. So, I know that can be done.
Fifth, let's not confuse TLA, Tax Limitation Amendment, with fundamental tax reform, and I know you don't, but I just think it's important that the public understand that. There will also be an incentive under TLA for Congress to utilize the other means of acquiring command over resources; that's borrowing and regulation. And so, that means that the TLA simply wouldn't be addressing those, and you would have to address those.
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Let me emphasize, as well, my reading of this amendment language. We do nothing to restrain the growth of tax revenues from existing statutes from economic growth. There's debate over whether the tax code is inherently regressive or progressive in the sense that, if you increase, say GDP, by 10 percent, would you increase Federal tax revenue by more than 10 percent or less than 10 percent? But the best predictor of Federal revenues is GDP: it's a little black box, you put the numbers in, you turn the crank, and out spits the pages and the estimate. So, even if you have a tax limitation amendment, total Federal revenue will continue to grow as long as the economy grows. It may even grow as a proportion of the total Gross National Product, which goes against the concern that I have; it doesn't address in important ways the concern I have.
Let me stop there, Mr. Chairman and members of the committee. I'll be glad to respond to your questions.
[The prepared statement of Mr. Miller follows:]
PREPARED STATEMENT OF JAMES C. MILLER, COUNSELOR, CITIZENS FOR A SOUND ECONOMY
Mr. Chairman and Members of the committee, I welcome this opportunity to testify on behalf of a tax limitation amendment (TLA) to the U.S. constitution.
As you may know, I served as President Reagan's budget director from October 1985 to October 1988, having responsibility for the FY 1985–1987 budgets. Presently, I serve as Counselor to Citizens for a Sound Economy (CSE) and am John M. Olin Distinguished Fellow at CSE Foundation(see footnote 4) and the Center for Study of Public Choice at George Mason University.
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One does not amend the Constitution on a whim. But when a significant weakness in our basic decisionmaking institutions emerges, the most effective recourse is to amend the constitution.
The relevant weakness is the propensity of congress and the president to raise taxes to levels above optimal levels, as most people would define the term ''optimal.'' Quite simply, within relevant ranges larger government—enabled by higher taxes— significantly restrains economic growth and thus stifles economic opportunity for ourselves as well as our progeny.
Why do I suggest that this problem has ''emerged?'' Wasn't this something the Founding Fathers would have foreseen? Probably not. In the beginning, the federal government's sources of revenues were very limited. Not until the aborted attempt during the Civil War, and then passage of the 16th Amendment, did the federal government tax the incomes of its citizens. Moreover, when federal taxes constituted only a small traction of GDP, the temptation to increase taxes—to expand government—was not very great. But as the size of government grew, the temptation to increase taxes grew stronger and stronger. As recently as 1940—after the run-up in the size of the federal government during the Great Depression—federal taxes were only 6.7 percent of GDP. In 1951, during the Korean War, taxes were only 16.1 percent of GDP, and the federal government ran a surplus. Since the late 1960s, federal taxes have approached 20 percent of GDP.
Moreover, there is considerable economic ignorance among some in congress and others who influence tax policy. For example, several years ago I heard the chairman of one of the major ''money committees'' in congress say to a group of budget experts and industry officials: ''If you want to stimulate the economy, you've got to get [increased tax] money in [to the federal government] as quickly as possible.'' This, I submit, is a mind-set that may perpetuate the growth of government, but is altogether destructive of economic growth and opportunity. The TLA would not make the ignorant economically literate, but it would restrain their influence.
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There is considerable evidence that reducing the size of government, at least relative to the size of the GDP, would increase the rate of economic growth. And while these studies are not all in agreement as to precise results and use different databases and methodologies, their results are robust on the following basic point: the rate of economic growth would be higher if government were smaller.
Worthy of special note is a study by professor Gerald Scully of the University of Dallas. Based on an empirical analysis of U.S. data from 1949 through 1989, he found that had the government's fraction of GDP been 22 percent instead of 35 percent (all levels, including state and local taxes), the economy would have expanded at a 5.6 percent annual rate vs. the 3.5 percent actually observed. Total wealth creation would have been $76.4 trillion vs. $29.9 trillion. And, most interestingly, tax revenue would have been $17.5 trillion vs. $13.8 trillion.
Studies by Richard Rahn and Harrison Fox, Gary and Aldona Robbins, Keith Marsden, and others draw similar conclusions.
We also have evidence that, everything else equal, a TLA would restrain the size of government. A multivariate analysis based on data from the 50 U.S. states conducted by George Mason University colleague Mark Crain and me showed that a supermajority requirement for raising taxes lowers the rate of growth in per-capita state spending. Most interestingly, the effects were far more significant where the state had no requirement in its constitution to balance the state budget. (See W. Mark Crain and James C. Miller III, ''Budget Process and Spending Growth,'' William and Mary Law Review, Spring 1990.)
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The clear implication of this research is that a federal TLA would restrain the growth of federal spending (as well as taxes) and is needed now more than ever, given that approval of a balanced budget amendment (BBA) is unlikely anytime soon.
Let me now address several matters about the proposed TLA.
First, inherently it will be more difficult to employ than a BBA. Under a BBA, application is quite clear: for the fiscal year the amount of money coming into the federal treasury must be at least as much as the amount going out. Under the TLA, the mandate relates to estimated effects. Does this tax proposal increase tax receipts or not? Depending on the proposal, this task can be quite difficult and the results subject to disagreement among experts, not to mention demagoging by interested parties.
Second, I note that the amendment would apply to ''internal revenue'' and would exclude tariffs, duties, and offsetting receipts. I would suggest the limit include these items. They are an increasingly significant portion of the federal government's total revenue (esp. offsetting receipts), and perhaps more importantly, excluding these items from the limit would encourage congress and the president to increase such taxes, and in the case of tariffs and duties such increases would have horrific effects on our international trade and our economic growth.
Third, let me suggest that you take out the ''de minimis'' language. With all due respect, this detracts from the proposal's credibility. You apply a (modified) supermajority requirement to any tax increase, and then say an increase that's no more than one-tenth of 1 percent doesn't really matter. Moreover, imagine the competition each year over whose ox will not be gored to come up with the one-tenth of 1 percent tax increase. Also, you might make the test not the effects during the coming five years, but the present value of the tax increase, thus counting the effects beyond the fifth year as well. (Otherwise, you'd have a propensity to back-load tax increases—they have their major effects in the outyears.)
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Fourth, approval of a TLA should not be confused with tax reform. It would help restrain increases in tax receipts, but would not do anything to lower tax rates or to simplify the tax code. Moreover, if the ''static'' vs. ''dynamic'' scoring controversy is resolved toward the latter approach, the TLA enforcement program could be (ab)used to limit highly desirable changes such as cutting the tax rate on capital gains, not to mention cuts in tax rates on ordinary income—because, depending on circumstances, such changes could increase tax revenue. I think most people would view a change that increased incomes in the private sector by, say 10 percent, quite worthwhile, even if it increased federal revenues by, say 2 percent.
In conclusion, I want to go back to the basic point of why we should favor a TLA, or even a BBA. Increasingly it is certain that the burdens imposed by government—borrowing and regulation as well as taxes—are slowing economic growth significantly. Much of government is justified in the name of increasing the comfort levels of the less well-off. What we must consider, however, is that today's redistributional programs may lower tomorrow's standard of living—not only for Americans generally but for the poor as well.
Mr. HUTCHINSON. Thank you, Mr. Miller. We'll go ahead and proceed through the panel before we go to our questioning, and I'm grateful—I failed to point out the little red light there—but I appreciate all the witnesses summarizing their testimony and sticking with the time limitations. It will give us more time for questions as we proceed.
We welcome Mr. Greenstein, and we look forward to your testimony.
STATEMENT OF ROBERT GREENSTEIN, EXECUTIVE DIRECTOR, CENTER ON BUDGET AND POLICY PRIORITIES
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Mr. GREENSTEIN. Thank you, Mr. Chairman. Unlike Jim, I think this amendment is unwise, and hope that you do not pass it.
As you know, the Nation faces deficits of unprecedented magnitude in coming decades, if we maintain current entitlement and tax policies. CBO has forecast that under current policy the deficit will reach 12 percent of GDP by 2030. The deficits facing us in the years ahead are so massive that many budget experts believe we ultimately will need strong deficit reduction measures that include both spending cuts and revenue increases, but this amendment would effectively preclude such action; it would make it very difficult to pass deficit reduction packages that combine reductions in programs with measures to raise revenue, and as a result, would raise serious barriers to long-term deficit reduction.
I believe it would also skew fiscal policy in ways that benefit the most powerful in our country, because a two-thirds majority would be required to curb special-interest tax expenditures, which disproportionately benefits people at a higher income level. The decisions on how to shrink the deficit and apportion the sacrifice should be made on a level playing field; this would make the playing field unbalanced.
And thirdly, and the last item I want to cover, is that, it would make it harder, this amendment, to do what we need to do to restore long-term balance to social security and Medicare, because some of the measures that ought to get serious consideration would suddenly be subject to a two-thirds barrier, and might be difficult, probably would be difficult, to pass.
On the first point, the long-term fiscal forecast, I recall that when the Bipartisan Commission on Entitlement and Tax Reform, that I had the honor of serving on, met in 1994, Bob Reischauer, then the CBO Director, talking to us about how massive the long-term deficits were, looking out towards 2030, testified that, in his view, one I share, that when you look at what you would need to do, to do all of the necessary deficit reduction on the spending side, you get to the point, particularly in some of the large popular programs, that it goes beyond what the public will accept. And that in the long run, we probably can't do the deficit reduction that's required unless we are able to marry packages of spending reductions and appropriate revenue raisers.
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The proposed constitutional amendment, however, is designed to ensure that virtually none of the future deficit reduction measures come from the revenue side, but that it would have this effect and be seen by looking at House votes for the four principal deficit reduction measures enacted between 1982 and 1993 that were packages combining spending cuts and revenue increases. Although three of the four measures were signed by Republican Presidents, and all were supported by Democratic congressional leaders, none got two-thirds support on the House floor, nor did a fifth measure, the 1983 Social Security Rescue Plan, which included in it accelerations of social security payroll tax collections. Despite President Reagan's support, it, too, fell short of a two-thirds vote.
On the tax expenditures side, I would note that there's growing interest on the Hill from Congressman Kasich and others in curbing corporate welfare. A recent CBO study found that over half of the corporate subsidies the Federal Government provides are delivered through the tax code. Curbing corporate welfare provided through the tax code is one of a number of ways we need to look at to help reduce the deficit, but would require a two-thirds vote under this amendment, which it would make it very difficult, largely ruling out efforts to close unproductive corporate breaks as one of the elements in deficit reduction.
This flies in the face of a recommendation from Alan Greenspan to the Entitlement Commission in 1994. Greenspan referred to tax expenditures as quote, his words, ''tax entitlements''—because he said they entitle those who qualify for them, the Government subsidies provided in the form of a tax reduction. Greenspan told us that tax entitlements should be looked at along with spending entitlement, if we want to deal with the long-term deficit.
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But the proposed constitutional amendment would likely encourage the spread of more tax expenditures, more tax entitlements, over time since those measures would take only a majority to enact, but a two-thirds vote to remove. Suppose Congress passed a tax change thought to be deficit-neutral, high-price lawyers and accountants found ways to convert the measure into tax shelters at greater-than-anticipated cost; it would take a two-thirds vote to get the shelter out. Even measures to raise revenue by shutting down tax fraud opportunities would require a two-thirds vote under this amendment.
In the area of Social Security and Medicare, we clearly need to take strong action in both areas in the decades ahead. But this amendment poses two problems for Social Security and Medicare. One, I think it would likely place pressure for greater-than-otherwise-needed reductions in those areas for the simple reason that they're eventually projected to constitute more than half of the Federal budget, exclusive of interest payments on the debt, and if one can't do anything on the revenue side, it puts more pressure there. Perhaps, more important, some of the measures in this area, such as a Republican proposal that I strongly support to increase premiums on Medicare Part B for my affluent beneficiaries, when that came to the House floor in 1995, the House Parliamentarian advised that it could constitute a tax increase and would violate a rule of the House in effect at that point for a three-fifths majority for measures raising tax rates. The House leadership arranged for a waiver, but if there's a two-thirds requirement in the Constitution, you can't arrange for a waiver, and measures such as that could be ruled out along with a measure that every member of the Advisory Committee on Social Security this year, including the most conservative members, every one the them recommended that all State and local employees be in the social security system, the last group of workers that are left out. Bringing them in involves increasing payroll tax revenues, because they would need to contribute, and that measure, also, would include a two-thirds vote.
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In short, and I'll conclude, Mr. Chairman, the proposed amendment would essentially end the ability of a majority of the American people, acting through their duly-elected representatives, to decide whether they would like to raise revenue as part of deficit reduction measures or to meet needs the majority finds legitimate. By placing this amendment in the Constitution, it would deny the majority this right, now and in the future.
I believe that at its core the amendment is rooted in deep distrust of the ability of a majority of the American people to make decisions that the authors of the amendment believe to be ideologically correct. I believe the majority should have the right to make these decisions, rather than limiting it to two-thirds of the Representatives that are elected.
Thank you very much.
[The prepared statement of Mr. Greenstein follows:]
PREPARED STATEMENT OF ROBERT GREENSTEIN, EXECUTIVE DIRECTOR, CENTER ON BUDGET AND POLICY PRIORITIES
I appreciate the invitation to testify before the Subcommittee today. I am Robert Greenstein, executive director of the Center on Budget and Policy Priorities. The Center is a non-partisan policy institute that analyzes a range of federal and state policy issues, with an emphasis on fiscal policy and on programs and policies affecting low and moderate-income families. The Center receives no government funds.
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We have examined the proposal now before the Subcommittee to amend the U.S. Constitution to require a two-thirds vote by the House and Senate for any bill that raises federal revenues. Our examination indicates that such an amendment would be ill-advised.
The nation will face deficits of unprecedented magnitude in coming decades if we maintain current entitlement and tax policies. In 1996, the Congressional Budget Office forecast that due primarily to pressures resulting from the retirement of the baby boom generation, the budget deficit is expected to equal 12 percent of the Gross Domestic Product (the basic measure of the size of the U.S. economy) by 2030 if current policies are not changed. The deficits facing us in those years are so massive that many budget experts believe we ultimately will need to consider strong deficit reduction measures that include both spending cuts and revenue increases.
The proposed constitutional amendment, however, would effectively preclude such action. The amendment would make it virtually impossible to amass the two-thirds majority required to pass large deficit reduction packages that include both reductions in federal programs and measures to raise revenue. As a result, the amendment would erect serious new barriers to long-term deficit reduction.
Furthermore, the amendment would be likely to skew fiscal policy in ways that benefit the wealthiest and most powerful at the expense of the rest of the U.S. population. A two-thirds majority would be required to curb special interest tax expenditures, which disproportionately benefit those at high income levels. By contrast, a simple majority vote would be required to cut federal programs, which tend primarily to benefit the middle class and the poor. Decisions as to how to shrink the deficit and apportion the sacrifice would not be made on a level playing field.
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Finally, the amendment is inconsistent with the basic principles of majority rule that are at the heart of American democracy.
I. THE CONSTITUTIONAL AMENDMENT AND THE LONG-TERM FISCAL FORECAST
The federal deficit has now been reduced to about 1.5 percent of the Gross Domestic Product, a level that the 1996 CBO report indicates would not cause significant damage if deficits remained at that level over a substantial period of time. But if no action is taken to raise revenue or restrain Medicare, Social Security, Medicaid, and lesser entitlements—and other federal spending remains constant as a share of GDP—the deficit will rise sharply when the baby boom generation retires. CBO has forecast the deficit will rise to 12 percent of GDP by 2030 if no such action is taken.
Deficits of that magnitude would be unhealthy for the U.S. economy. To avoid such a development, major deficit reduction that extends well beyond the steps Congress and the Administration are currently considering will eventually be needed.
Testifying before the Bipartisan Commission on Entitlement and Tax Reform in 1994, Robert Reischauer, then the director of the Congressional Budget Office, observed that the public would be unlikely to accept the steps that would be required either to extract all of the needed deficit reduction in the decades ahead just from government programs or to extract all of the needed deficit reduction just from revenues. In the long run, Reischauer predicted, policymakers will agree on some mix of program cuts and revenue increases to prevent deficits of a magnitude that would do substantial damage to the economy.
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The proposed constitutional amendment is designed to ensure that virtually none of those future deficit reduction measures come from the revenue side and virtually all come from cutting programs.(see footnote 5) That the amendment would bar virtually all revenue increases can be seen by examining House votes for the four principal deficit reduction measures enacted between 1982 and 1993 that raised federal revenue. Although three of these four measures were signed by Republican presidents and all four enjoyed the support of Democratic Congressional leaders, none received two-thirds support on the House floor. A fifth measure—the 1983 Social Security rescue plan, which increased Social Security payroll tax collections—also failed to secure a two-thirds vote despite strong support from President Reagan and Congressional leaders.
The constitutional amendment thus would likely lead to one of several outcomes: (1) larger deficits over time; (2) a greatly shrunken federal government that is unable to do very much beyond running Social Security and Medicare, maintaining national defense, making federal pension and veterans payments, and paying interest payments on the national debt; and (3) overly steep reductions in Social Security and Medicare that significantly reduce the living standards of millions of elderly people who are not well off. Such stark outcomes are not necessary if a balance of spending cuts and revenue-raisers ultimately can be considered over the next three decades. Such balance is what the amendment is designed to prevent.
That the statements in the previous paragraph are not hyperbole can be seen by examining the long-term fiscal forecast CBO issued last year on the magnitude of the deficit through 2050 under current tax and entitlement law. When the baby boom generation reaches retirement and an unprecedented proportion of the population is elderly, some increases in revenues are likely to be needed, in addition to actions to restrain expenditures across the government, including expenditures for Social Security and Medicare.
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"The Official Committee record contains additional material here."
Strip offset folio 1 here
II. THE AMENDMENT EFFECTIVELY BARS MEASURES TO CLOSE TAX LOOPHOLES
The requirement for a two-thirds majority would apply not only to measures to raise tax rates but also to measures to cut unproductive tax expenditures that grant subsidies to powerful special interests. A recent Congressional Budget Office study found that over half of the corporate subsidies the federal government provides are delivered through the tax code. Curbing corporate welfare provided through the tax code is one way to help reduce the deficit, but it would require a two-thirds vote under the proposed amendment. This would essentially rule out closing unproductive corporate tax breaks as a way to help shrink the deficit.
In fact, a substantial share of the federal budget would effectively be placed off limits for deficit reduction by the constitutional amendment. Provisions of the tax code that the joint Committee on Taxation classifies as ''tax expenditures''—spending programs that operate through the tax code by selectively reducing the tax liability of particular individuals or businesses—now cost more than $400 billion a year. (The corporate subsidy provisions that operate through the tax code are a part of this total.) This is more than the government spends on Social Security or defense.
In testimony before the Entitlement Commission in 1994, Federal Reserve Board chairman Alan Greenspan referred to these provisions of the tax code as ''tax entitlements'' because they entitle those who qualify for them to government subsidies provided in the form of a tax reduction. Greenspan testified that the tax entitlements should be looked at, along with the spending entitlements, in developing measures to address the nation's long-term deficit problem.
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If anything, the proposed constitutional amendment would encourage the spread of more tax expenditures over time, since such measures would take only a majority vote to enact but a two-thirds vote to remove. In addition, if Congress passed a series of tax changes that were thought to be deficit-neutral, but clever, high-priced tax lawyers and accountants then found ways to convert some of the measures into tax shelters at greater-than-anticipated cost to the Treasury, it would take a two-thirds vote to scale the shelters back so the original measure did not produce a net revenue loss.
Even measures that raised revenue by shutting down opportunities for tax fraud would require a two-thirds vote. So would measures, for example, to tighten tax procedures so billionaires who made their fortunes in the United States did not move abroad and become expatriates to avoid paying their fair share of taxes. Measures to prevent companies from gaining tax advantages by moving plants and jobs overseas are another example of legislation that would need a two-thirds majority to pass.
III. AMENDMENT TILTS TOWARD THE WEALTHY AND THE POWERFUL AT THE EXPENSE OF AVERAGE FAMILIES AND THE POOR
Most government benefits that low- and middle-income Americans receive come from government programs, such as Social Security, Medicare, Medicaid, student loans and grants, unemployment insurance, school lunches, and food stamps. By contrast, most government subsidies that wealthy individuals and large corporations receive come through tax subsidies. As a result, a constitutional amendment that makes it extremely difficult to scale back tax subsidies when decades of deficit reduction lie ahead tilts the playing field in favor of the wealthy and powerful over Americans of average or lesser means.
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In addition, such a constitutional amendment would place off-limits even measures asking program beneficiaries who have high incomes to pay more for the government benefits they receive. For example, measures to ''means test'' Medicare premiums by raising the premium charges for those at high income levels must rely on the tax code to collect the increased premiums, since Social Security offices (which administer Medicare) have no information on beneficiaries' current incomes. Indeed, when the Republican budget bill reached the House floor in the fall of 1995, the House parliamentarian advised that its provision raising Medicare premiums for those at higher income levels could constitute a tax increase. Under the constitutional amendment, measures of this nature would require a two-thirds vote, rendering them extremely difficult to pass. This makes it more likely that when steps are taken to restrain Medicare costs, low-income and middle-income beneficiaries would have to bear a heavier share of the load.
The amendment also would be likely to injure the middle class and the poor for another reason. If the federal government is unable to raise revenue when needs for public expenditures rise, one likely result will be to shift more of the burden of raising revenue and meeting public needs to state and local governments. Most state tax codes are regressive (i.e., the taxes they impose consume a larger percentage of the income of lower-income households than of higher-income households). State and local governments extract a larger proportion of the revenues they raise from the middle class and the poor, and a smaller proportion from the affluent, than the federal government does. If revenue-raising burdens are shifted from the federal to state and local levels, the share of the overall tax burden borne by the middle class and the poor is likely to rise.
IV. AMENDMENT COULD LEAD TO OVERLY LARGE CUTS IN SOCIAL SECURITY AND MEDICARE BENEFITS
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Social Security and Medicare benefits need to be restrained in the years ahead. Both programs are out of long-term actuarial balance, and both contribute significantly to the projected increase in the long-term deficit.
But the constitutional amendment would likely lead to larger reductions in Social Security and Medicare benefits than otherwise would be needed, reductions that could adversely affect the living standards of modest-income or poor retirees. This would be the case for several reasons.
First, by effectively preventing revenues from contributing to deficit reduction despite the need for large-scale deficit reduction in the decades ahead, the amendment would place a greater deficit-reduction load on Medicare and Social Security. These two programs are projected eventually to constitute half or more of the federal budget, exclusive of interest payments on the debt. If there is no revenue contribution to deficit reduction, there will have to be a greater contribution from Medicare and/or Social Security than would otherwise be the case.
Second, the amendment would effectively rule out measures to raise Medicare premiums for those at higher income levels. As noted above, the 1995 budget reconciliation bill contained such a measure. When it was about to come to the House floor, the House parliamentarian advised that it could constitute a tax increase. A House rule that Congress adopted in January 1995 required a three-fifths majority for measures raising tax rates, so the parliamentarian's advice meant the budget bill would need a three-fifths vote unless this rule was waived. The House leadership promptly arranged for a waiver of the rule. But once a supermajority requirement is in the Constitution, no waivers are possible.
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Third, the constitutional amendment effectively rules out even small adjustments in Medicare and Social Security payroll taxes as part of the effort to bring these programs into long-term actuarial balance and also help reduce the deficit. Modest increases of a fraction of a percentage point in the payroll tax would require a two-thirds vote, thereby making them virtually impossible to achieve. Yet Medicare in particular is so far out of actuarial balance that it is difficult to see how to restore long-term balance to the program without some increase in payroll tax contributions along with other significant changes, unless the health insurance that Medicare provides is scaled back substantially.
In a symposium in 1995, Henry Aaron of the Brookings Institution, who is a well-known expert in this area, observed that the full $270 billion that Republican Congressional leaders were seeking at that time in Medicare savings over seven years could be achieved if one combined those aspects of the Republican Medicare proposals that represented sound (and in Aaron's words, courageous) policy—and that yielded about half of the $270 billion in savings—with an increase of one-quarter of one percentage point in the employer and the employee shares of the Medicare payroll tax. This would slightly reduce workers' wages. (Most economists believe that both the employee and the employer shares of payroll taxes are effectively borne by employees in the form of lower wages than the employees otherwise would receive. As a result, claims that small increases in payroll taxes would heavily burden employers and cause substantial job loss have little merit.) In return, employees would get a Medicare system that had the resources to provide continually improving health care to their parents and ultimately to themselves as it took advantage of emerging medical technologies that improve health and prolong life.
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Furthermore, one of several reasons that Medicare and Social Security face long-term deficits is that over time, a steadily increasing share of employee compensation is being provided in the form of fringe benefits not subject to the payroll tax, while a steadily smaller share is provided in wages that are subject to the tax. Modest measures to shore up Social Security and Medicare by slowing the erosion in the share of employee compensation subject to the payroll tax would, however, require a two-thirds majority under the proposed amendment.
Even measures to bring all state and local government employees into the Social Security system—a step nearly all budget analysts favor regardless of whether they are conservative or liberal, and which would strengthen the Social Security system and reduce the deficit—would require a two-thirds vote, because such measures would increase federal revenue. Such measures would become virtually impossible to pass.
V. WEAKENING OUR SYSTEM OF DEMOCRACY
The amendment would seriously weaken the principle of majority rule that has been at the heart of our system of representative democracy for more than 200 years. As Rep. James Moran has observed, it would partially restore the system we had in the 1780s under the Articles of Confederation, a system that functioned poorly and was soon scrapped.
The Articles of Confederation required the vote of nine of the 13 states to raise revenue. At the Constitutional Convention in 1787, the Founding Fathers recognized this was an insurmountable defect and fashioned a national government that can impose and enforce laws and collect revenue through simple majority rule.
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The proposed constitutional amendment would end the ability of a majority of the American people, acting through their duly elected representatives, to decide whether they would like to raise more revenues so the federal government can address needs the majority finds legitimate. The amendment would deny the majority this right both now and in future generations.
At its core, the amendment is rooted in deep distrust of the ability of the majority of the American people to make decisions that the authors of the amendment believe to be ideologically correct. Hence, the amendment seeks permanently to deny the majority that right. Powerful, well-connected minorities would gain great power at the expense of the majority. As a result, the amendment must be regarded as antidemocratic.
VI. THE POTENTIAL FOR EXTENSIVE LITIGATION
Finally, if placed in the Constitution, the proposed amendment would raise a host of knotty issues that would probably need to be resolved by the Supreme Court. For example:
Is a bill that increases revenues in some years but decreases them in others (and decreases them over a multi-year period) unconstitutional if it does not secure a two-thirds vote?
What if ''supply side'' arguments were considered correct in a certain circumstance, and a particular tax cut was estimated to increase revenues? Would that render the legislation containing this tax cut unconstitutional unless the legislation secured a two-thirds vote?
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Votes for Recent Legislation that Raised Taxes
Between 1982 and 1993, five pieces of legislation that raised significant revenue were enacted. President Reagan signed three of these measures, while President Bush and President Clinton each signed one. All five failed to secure a two-thirds vote on the House floor.
In passing the Tax Equity and Fiscal Responsibility Act of 1982, a measure crafted in substantial part by Senator Bob Dole, the House vote was 226–207. When the House considered its version of the 1983 Social Security rescue plan the following year, the vote was 282–148. The vote for the 1987 budget reconciliation bill, a product of bipartisan negotiations that contained both spending cuts and revenue increases, was 237–181, while the 1990 budget agreement passed by only 228 to 220. The 1993 budget agreement passed by a slender 218–216 vote.
During this period only one measure that raised revenue secured a two-thirds vote, the 1989 reconciliation bill. The 1989 bill was a minor measure. It did relatively little to reduce the deficit and contained only very small revenue increases. The revenue increases in all five of the pieces of legislation that failed to secure a two-thirds vote exceeded the level of revenue increases in the 1989 bill.
Most States Do NOT Have Supermajority Requirements
Only seven states require the approval of at least two-thirds of their legislatures for any tax increase. Six other states either require such approval for some taxes but not others, require a three-fifths rather than a two-thirds vote, or both. Other states generally require simple majority approval for revenue increases of all sorts.
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Furthermore, a 1993 General Accounting Office study of state budget trends found that a majority of states surveyed had used both spending cuts and revenue increases to balance their budgets in recent years. Revenue increases accounted for about one-third of the deficit reduction these states instituted to balance their budgets during the period studied.
James Madison on Majority Rule
The Constitutional Convention rejected requiring supermajority approval for basic functions such as raising taxes. Supermajority rules had applied in the Continental Congress. The framers of the constitution had experience with these rules and understood what they were rejection.
In the Federalist Papers No. 58, James Madison, on of the key figures in drafting the Constitution, explained why the Constitution rejected supermajority rule:
''It has been said that more than a majority ought to have been required for a quorum, and in particular cases, if not in all, more than a majority of a quorum for a decision. . . . [But that would mean] . . . [i]n all cases where justice or the general good might require new laws to be passed, or active measures to be pursued, the fundamental principle of free government would be reversed. It would be no longer the majority that would rule; the power would be transferred to the minority. Were the defense privilege limited to particular cases, an interested minority might take advantage of it to screen themselves from equitable sacrifices to the general weal, or in particular emergencies to extort unreasonable indulgences.''
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Madison equated majority rule with ''free government.'' In his view, freedom consisted not just in protecting individuals from unreasonable intrusion by government, but also in the right of citizens to have an equal voice in the affairs of government. According to Madison, a person whose vote is diluted by supermajority rules is not an equal citizen and so does not fully enjoy the fruits of freedom.
Mr. HUTCHINSON. Thank you, Mr. Greenstein. We appreciate that, and we now recognize Dean Thompson, from the University of Miami School of Law.
STATEMENT OF SAMUEL C. THOMPSON, DEAN, UNIVERSITY OF MIAMI SCHOOL OF LAW
Mr. THOMPSON. Thank you, Mr. Chairman, and other Members of the subcommittee. I appreciate the opportunity to express my views on H.J. Res. 62.
My comments are limited to the impact of this provision on the structure of the Federal income tax. I believe that the adoption of this super-majority provision would have perverse effects of, one, encouraging the search for tax loopholes; two, penalizing the American public for the inevitable mistakes that will be made in the tax legislative process; and, three, needlessly hampering the ability of Congress to conduct fiscal policy.
On March 6, 1996, I testified before this subcommittee, on H.J. Res. 159, which would have required a two-thirds majority vote for any bill to, ''increase the rate or base of any tax.'' It was clear that H.J. Res. 159 would have required a separate super-majority vote on all base-broadening provisions of a tax bill, even though the bill may have resulted in an overall reduction in taxes. It is not clear from the text of H.J. Res. 62, whether it has the same effect or in the alternative would apply only to a bill that leads to, on an overall basis, an increase in tax.
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If H.J. Res. 62 applies separately to each provision of a bill that broadens the base or increases the tax rate, then, as a practical matter, a super-majority vote will be required on every piece of Federal income tax legislation, including legislation that may, on an overall basis, result in a tax reduction.
For example, under this interpretation, even the enactment of a flat tax would require a super-majority vote, because any such tax would contain base-broadening provisions. If, on the other hand, H.J Res. 62 applies on an overall basis, then any attempt by Congress or Treasury to close any loophole by a base-broadening provision would have to be accompanied by another provision that reduced the tax revenues by an offsetting amount, unless a two-thirds majority could be mustered. Under either interpretation, H.J. Res. 62 will have the effect of making it much harder for Congress to close tax loopholes, because any such legislation could be blocked by a mere 34 percent vote in either House of Congress.
From an economic perspective, since this legislation makes it more difficult to repeal loopholes, it makes loopholes more valuable, and since loopholes will become more valuable, sophisticated taxpayers will devote more time lobbying Congress in an effort both to enact and to preserve loopholes. Thus, one perverse effect of this amendment would be to encourage lobbying efforts to enact and to preserve loopholes.
The amendment would also penalize the American public for mistakes made in the tax legislative process. For example, assume that after adoption of this constitutional amendment, Congress adopts a flat tax; assume that before enactment, it is estimated the flat tax will reduce revenues by $100 billion. It turns out, however, that the revenue estimates are wrong, and that the actual revenue loss is $200 billion, which will lead to a significant increase in the budget deficit. The Treasury immediately proposes legislation to increase the revenues by $100 billion, restoring fiscal responsibility. The legislation is, however, opposed by powerful special-interest groups, who will prevail, if they can convince just 34 percent of the Members of either the House or the Senate to vote against the amendment. It is hard to believe that the drafters of this resolution could intend that this type of mistake in the tax legislative process could only be corrected with a super-majority vote.
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Adjustments in the rate structure of the Federal income tax are powerful tools of fiscal policy. There are times when the economy needs a general rate reduction, and there are other times when the economy needs a general rate increase.
Adoption of this proposed constitutional amendment would put an unnecessary restraint on the ability of Congress, properly to conduct fiscal policy. Indeed, it could even make needed tax reductions less likely, because legislators would realize that the super-majority provision would make it more difficult to take corrective actions, if a tax reduction turned out to be fiscally imprudent. Thus, this bill could lead to gridlock in the conduct of fiscal policy through the Federal income tax system.
In summary, the core problem with this proposed constitutional amendment, is that it would give special-interest groups the upper hand in the tax legislative process. Once a group of taxpayers receives either a planned or unplanned tax benefit with a simple majority vote of both Houses of Congress, the group will then be able to preserve the tax benefit with just a 34 percent vote in one House of Congress. Thus, this amendment would create an unlevel playing field in the tax legislative process. Indeed, I believe, that if enacted, this amendment would become known as the tax loophole preservation amendment to the Constitution.
One final point: this legislation raises the fundamental question of fairness. The tax code is full of tax expenditures; that is, special deductions and credits. Many of the beneficiaries of these tax expenditures are wealthy individuals and large profitable corporations. These tax benefits for these wealthy taxpayers have become known as corporate welfare. The enactment of this amendment could have the effect of making these corporate welfare tax expenditures less vulnerable to legislative change while direct welfare expenditures for the poor and disenfranchised will continue to be subject to change by a mere majority vote.
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I submit that a dispassionate analysis of this proposed constitutional change would lead to the inevitable conclusion that, on several grounds, the proposal is unwise and should be flatly rejected.
Thank you, sir.
[The prepared statement of Mr. Thompson follows:]
PREPARED STATEMENT OF SAMUEL C. THOMPSON, JR., DEAN AND PROFESSOR OF LAW, UNIVERSITY OF MIAMI SCHOOL OF LAW
Thank you, Mr. Chairman and other members of the subcommittee. I appreciate the opportunity to express my views on H.J. Res. 62, which ''Propose[s] an Amendment to the Constitution of the United States with Respect to Tax Limitation.''
My comments today are focused on the provision of H.J. Res. 62 that would amend the Constitution to require a two-thirds majority vote for any bill to increase the internal revenue . . . unless that bill is determined at the time of adoption, in a reasonable manner prescribed by law, not to increase the internal revenue by more than a de minimis amount.''
I am a specialist in Federal income tax law and have been either a tax lawyer or a tax professor since graduation from law school in 1971, My comments, therefore, are limited to the impact of this provision on the structure of the Federal income tax.
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I believe that the adoption of this supermajority provision would have the perverse effects of (1) encouraging the search for tax loopholes, (2) penalizing the American public for the inevitable mistakes that will be made in the tax legislative process, and (3) needlessly hampering the ability of Congress to conduct fiscal policy.
A. Encouraging loopholes
On March 6, 1996, I testified before this Subcommittee on H.J. Res. 159, which would have required a two-thirds majority vote for any bill to ''increase the rate or base of any tax. . . .'' It was clear that H.J. Res. 159 would have required a separate supermajority vote on all base-broadening provisions of a tax bill even though the bill may have resulted in an over-all reduction in taxes. It is not clear from the text of H.J. Res. 62 whether it has this same effect or in the alternative would apply only to a bill that leads on an over-all basis to an increase in tax. If H.J. Res. 62 applies separately to each provision of a bill that broadens the base or increases the tax rate, then as a practical matter a supermajority vote will be required on every piece of Federal income tax legislation, including legislation that may on an over-all basis result in a tax reduction. If, on the other hand, H.J. Res. 62 applies on an over-all basis, then any attempt by Congress or the Treasury to close any loophole by a base broadening provision would have to be accompanied by another provision that reduced the tax revenues by an offsetting amount, unless a two-thirds majority could he mustered.
Under either interpretation, H.J. Res. 62 will have the effect of making it much harder for Congress to close tax loopholes, because any such legislation could be blocked with a mere 34% vote in either house of Congress.
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From an economic perspective, since this legislation makes it more difficult to repeal loopholes, it makes loopholes more valuable. And, since loopholes will become more valuable, sophisticated taxpayers will devote more time lobbying Congress in an effort both to enact and to preserve loopholes. Thus, one perverse effect of this amendment would be to encourage lobbying efforts to enact and to preserve loopholes.
B. Penalizing the American Public for Mistakes in the Tax Legislative Process
This amendment would also penalize the American public for mistakes made in the tax legislative process. For example, assume that after adoption of this Constitutional amendment, Congress adopts a flat tax. Assume that before enactment it is estimated that the flat tax will reduce revenues by $100 billion. It turns out, however, that the revenue estimates are wrong and the actual revenue loss is $200 billion, which will lead to a significant increase in the budget deficit. The Treasury immediately proposes legislation to increase the revenues by $100 billion, thereby restoring fiscal responsibility. The legislation is, however, opposed by powerful special interest groups who will prevail if they can convince just 34% of the members of either the House or the Senate to vote against the amendment.
It is hard to believe that the drafters of H.J. Res. 62 could intend that this type of mistake in the tax legislative process could only be corrected with a supermajority vote.
C. Flexibility in Conducting Fiscal Policy
Adjustments in the rate structure of the Federal income tax are powerful tools of fiscal policy. There are times when the economy needs a general rate reduction, as was generally thought to be the case in 1981 when Congress enacted the Economic Recovery Tax Act of 1981, and there are other times when the economy needs a general rate increase, as was generally thought to be the case in 1984 when Congress enacted the Deficit Reduction Tax Act of 1984.
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Adoption of this proposed Constitutional amendment would put an unnecessary restraint on the ability of Congress properly to conduct fiscal policy. Indeed, it could even make needed tax reductions less likely, because legislators would realize that the supermajority provision would make it more difficult to take corrective action if a tax reduction turned out to be fiscally imprudent. Thus, this bill could lead to grid-lock in the conduct of fiscal policy through the Federal income tax system.
D. Summary
The core problem with this proposed Constitutional amendment is that it would give special interest groups the upper hand in the tax legislative process. Once a group of taxpayers receives either a planned or unplanned tax benefit with a simple majority vote of both houses of Congress, the group will then be able to preserve that tax benefit with just a 34% vote in one house of Congress. Thus, this amendment would create an unlevel playing field in the tax legislative process. Indeed, I believe that if enacted this amendment would become known as the ''Tax Loophole Preservation Amendment to the Constitution.''
This proposal, I submit, is a bad idea and should be flatly rejected.
Mr. HUTCHINSON. Thank you, Dean Thompson.
We now recognize our next witness, Michael Rappaport, Professor Rappaport from the University of San Diego School of Law.
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STATEMENT OF MICHAEL RAPPAPORT, PROFESSOR, UNIVERSITY OF SAN DIEGO SCHOOL OF LAW
Mr. RAPPAPORT. Thank you, Mr. Chairman. I'm grateful for the opportunity to testify today in support of a constitutional amendment that would require a super-majority to raise taxes. I believe if this amendment were enacted, it would significantly improve both our political system and the economy.
Today, I'd like to offer two major arguments in favor of the concept of a super-majority taxation amendment. In my written statement, I discuss a couple of changes in the language of the amendment that Congress might want to consider, and I'd be happy to answer questions about them.
Now, the first reason to adopt the amendment is that it would help to correct what is probably the major problem of contemporary politics: the ability of special-interest groups to enact spending programs at the expense of the general public.
The second reason is that it would help to restore the original balance in our Constitution, a balance between, on the one hand, structures that promote economic growth and individual economic rights, and on the other hand, structures that further democratic governing.
Let me start with this second reason. The purpose of the original Constitution was not to establish a simple democracy. Instead, the framers sought a well-functioning Republic. While the framers recognized the importance of majority rule, they also understood that simple legislative majorities didn't always reflect the actual will of the people. The framers also designed the Constitution to further other goals besides simple democracy—goals such as promoting a stronger economy. Now, for these reasons, the framers placed various limits on rule by simple legislative majority in the Constitution.
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First, they established a bicameral legislature, and they gave the President a veto, in order to restrain and make it more difficult to pass harmful legislation. Second, the framers placed strict limits on the powers of the Federal Government, so that most economic legislation would be passed at the State level. Under this system of federalism, competition between the States would restrain burdensome legislation. Unfortunately, many of these limits on the Federal Government's spending and taxing powers have disappeared in this century. Under the modern interpretation of the Commerce Clause, Congress can enact spending programs of virtually any kind that it chooses. With the passage of the 16th Amendment, there are virtually no limits on the taxing powers of the Federal Government.
Thus, one reason to pass the super-majority taxation amendment is to restore some limits on the fiscal powers of the Federal Government. But the amendment would not merely help to revitalize the framers' vision of the Constitution; it would also help to solve one of the major problems of modern Government.
In recent years, the Federal Government has developed some serious financial problems: Government spending, taxes, debt have all increased significantly, and as a result, our economy has not grown at the rates it should. We're in the midst of an industrial revolution generated by computers, yet our growth rates are about 2 or 3 percent. The high spending in taxes that we're plagued with are primarily the results of special-interest. Special-interests are concentrated groups that have disproportionate power in the political process. Public choice theories suggest, observations confirm, that these special-interest groups are able to secure spending for themselves, while imposing costs on the rest of the public. These spending programs, generally, then translate into higher taxes.
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Now, while these increases in taxes are not popular, usually a majority of the legislature can be found to support these taxes, even though the public doesn't want them. And the reason is that the taxes are spread across the population as a whole; no one group bears the full burden of these taxes. So, when you have a small number of people who are going to gain a significant amount from a spending program, and a large number of people who are going to pay just a little bit more in taxes in order to finance that spending program, the small number of people, the special-interests, often prevail in the political process.
Now, a super-majority taxation amendment would help to reduce this power of special-interests. It would deter spending increases by making it harder to raise the tax that's necessary to fund them. As a result, both Government spending and taxation would be restrained, and economic growth should result.
Let me then conclude by saying that a super-majority taxation amendment would be an extremely desirable reform. The amendment would help to solve one of the major problems of modern Government, but it would do so in a manner entirely consistent with our constitutional heritage. Thank you.
[The prepared statement of Mr. Rappaport follows:]
PREPARED STATEMENT OF MICHAEL RAPPAPORT, PROFESSOR, UNIVERSITY OF SAN DIEGO SCHOOL OF LAW
Thank you very much for the opportunity to testify today in support of the concept of a constitutional amendment that would require a supermajority to raise taxes. We will offer two major arguments in favor of a supermajority taxation amendment in the abstract and then offer some brief thoughts about the H.J. Res. 62—the draft of such a constitutional amendment that is before us. We would be very pleased to work with your committee's staff as this amendment moves through the legislative process. It would be a pleasure to participate in such an important enterprise.
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A constitutional amendment to require a supermajority to raise taxes will help correct the major problem of contemporary politics—the ability of concentrated interest groups to obtain programs that benefit themselves at the expense of a diffuse and relatively helpless public. Second, such an amendment would also help restore the original Constitution's delicate balance between structures that protect individual rights and ensure economic growth and those that promote democratic governance. Thus we believe that a supermajority taxation amendment should be seen as an attempt to revive the original values of the Constitution rather than as a radical innovation.
The objective of the original Constitution was to establish a well functioning republic—a concept which is not necessarily synonymous with government by a simple legislative majority on all issues. The Framers well understood that a legislative majority only imperfectly reflected the majoritarian will of the people as a whole.(see footnote 6) Moreover, the Constitution was designed to optimize the protection of the people's individual rights as well as their political rights. In our republic, deliberative democracy is not the entire end of government but is also a means for advancing human liberties.(see footnote 7) The Constitution's limitations on legislative and even popular majorities are apparent not only from the Bill of Rights but also from the entire structure of government. Bicameralism and the separation of powers make it difficult for mere majorities to pass legislation. By dividing powers between the federal government and the states, the original Constitution further restrained the powers of a majority of the national legislature. We believe that a constitutional amendment requiring a supermajority to raise taxes is completely in accord with the overall objectives of the original Constitution, because a supermajority rule will both advance the interests of popular as opposed to legislative majorities and protect the individual rights of property and enterprise.
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(see footnote 8)WM. &designed to protect individual rights).
One of the fundamental problems of modern democratic politics is that concentrated interest groups have more influence with legislators than diffuse groups, even if the diffuse groups are a numerical majority.(see footnote 9) Public choice theory suggests, and observations confirm, that political entrepreneurs will therefore tend to favor a legislative agenda that provides benefits to cohesive and organized interest groups while imposing costs on the electorate as a whole.(see footnote 10) Our present budget crisis is in large measure a reflection of repeated instances of this dynamic. Legislators will trade votes to provide entitlements and other expenditure programs to numerous concentrated interest groups.(see footnote 11) The taxes (or debt) required to pay for expenditures do not impose a very substantial constraint on such activity because the incidence of the taxes (or debt) can be diffused over the entire population (and future generations if possible). Thus, a constitutional rule that requires a supermajority to raise taxes can be understood as a rough attempt to restore a more rather than less democratic balance between those adversely affected by taxes and those advantaged by expenditures.(see footnote 12) It functions as a precommitment by the society not to go down a road that will make everyone worse off in the end as concentrated interests groups demand expenditures that beggar the nation as a whole.(see footnote 13)
Moreover, because taxes encroach on the right of each individual to enjoy the fruits of his labor, the amendment also attempts directly to facilitate the protection of liberty. The Framers themselves were intensely concerned to protect property rights of citizens. They believed that these rights were natural rights that inhere in each one of us and that respect for such rights would lead to economic growth and the progress of civilization. Therefore, the original Constitution provided substantial direct protection to property and enterprise through such provisions as the Contracts Clause and the Takings Clause.(see footnote 14) Moreover, it provided indirect protection by establishing structures that would make it more difficult for government to expropriate the people's wealth. For instance, federalism encouraged regulatory competition between different regimes thus restraining the power of factions: if the regimes became too oppressive or too inefficient, individuals could always leave.(see footnote 15) The separation of powers and bicameralism raised the costs to factions of getting control of the entire government.(see footnote 16)
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Unfortunately, the constitutional protections for the rights of individual enterprise have largely disappeared in the last fifty years. The protections for property have been substantially curtailed. With the demise of any restraints on Congress' power under the Commerce Clause, federalism has been gravely weakened.(see footnote 17) With the rise of the administrative state, the separation of powers is a shadow of its former self.(see footnote 18) Therefore, there is a pressing need for structural amendments, like the supermajority taxation amendment, which would revive protections for the rights of individual enterprise. A society that constitutionally protects such rights is much more likely to enjoy long-term economic growth and prosperity.
Now let us turn to some specific concerns about the actual drafting of the amendment. First, we believe that the amendment would be improved by provisions requiring a balanced budget. An amendment that restricts tax increases without limiting debt might increase debt as political entrepreneurs move to meet the demands of concentrated interest groups by increasing debt—subject to a simple majority rule—rather than increasing taxes. An even more effective method of limiting the power of concentrated interest groups would be simply to require a supermajority for all new spending programs, other than those strictly necessary for national security. Nevertheless, even in the absence of provisions requiring a balanced budget or subjecting spending provisions to a supermajority vote, a supermajority taxation amendment would be beneficial, because restrictions on tax increases function, especially in the long run, to limit wasteful spending on behalf of concentrated interest groups.
While it might be argued that any reduced taxes will merely be replaced with increased debt, this is not true. There are checks on Congress' ability to run large deficits; otherwise, Congress would lower taxes and run much larger deficits. Both taxes and debt are generally opposed by voters, but to different degrees and by different groups. Public choice theory suggests that if Congress is not otherwise constrained, it will finance spending with that combination of taxes and debt that minimizes the opposition to the program it passes. Any rule, such as a supermajority taxation amendment, that forces Congress to alter this combination should thereby increase the opposition to Congress' financing and spending program and therefore lead to less spending. In other words, if the amendment forces Congress to finance spending with larger deficits that are even more unpopular than higher taxes, this will induce Congress to spend less than it otherwise would have.
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This theoretical argument is confirmed by political observation. Large deficits are cited particularly by the Republican majority as the primary reason to cut spending. Indeed, both supporters and critics of the Reagan tax cuts of the early 1980s have respectively celebrated and deplored the curtailment of government expenditure that the resulting deficits appeared to cause.(see footnote 19)
Second, we believe that Congress should carefully consider the role of the President in the legislative process resulting in tax increases. As the draft of H.J. Res. 62 stands, it is unclear what, if any, role the President has in the process. The Framers had strong reasons for giving the President a veto in the legislative process, including the process that leads to tax increases: the President is uniquely the representative of the nation as a whole and his participation makes it harder for any single transient faction or coalition of factions to work their will in a moment of political passion. Moreover, his participation brings the opportunity for more deliberation. This is obviously true when he exercises a veto because then Congress must vote again to pass the legislation. But the mere potential of a veto forces Congress to take another powerful and sophisticated viewpoint into account throughout the process.(see footnote 20) Therefore, we strongly recommend that the President be expressly provided with a veto in the process leading to tax increases. While we do not recommend a particular numerical supermajority for a supermajority tax amendment, it would be wise to require an even greater supermajority majority to pass a tax increase over a presidential veto. For instance, if the congressional supermajority stayed at two thirds, the veto override majority might be three quarters.
Third, H.J. Res. 62 appears to exempt customs and other taxes on foreign goods. We strongly believe that the amendment should require a supermajority to raise all taxes, whether domestic income taxes or tariffs on imported goods. Tariffs are harmful to the economy because they raise the prices of foreign goods for individuals and businesses in the United States. Moreover, tariffs are often supported by domestic firms and other special interests who desire protection against foreign competition. Indeed, if the amendment is not applied to customs, then it is likely that taxes on imported goods will increase as Congress seeks to raise funds in the one area where a supermajority is not required.
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Finally, we also have a suggested change in the language of H.J. Res. 62. At present, the amendment requires a supermajority to pass a bill that would ''increase the internal revenue.'' Under this language, it might be argued that bills which solely contained certain tax reductions, such as a decrease in the capital gains tax, would require a supermajority if the reduction would increase government revenues. This disturbing result could be avoided by redrafting the amendment to require a supermajority either to increase tax rates or to expand the base of a tax unless the bill is determined at the time of adoption, in a reasonable manner prescribed by law, not to increase the internal revenue by more than a de minimis amount.
Mr. HUTCHINSON. Thank you, Mr. Rappaport.
Our final witness will be Daniel Mitchell, who is the McKenna Senior Fellow in Political Economy at the Heritage Foundation. We welcome Mr. Mitchell and look forward to your testimony.
STATEMENT OF DANIEL MITCHELL, MCKENNA SENIOR FELLOW IN POLITICAL ECONOMY, HERITAGE FOUNDATION
Mr. MITCHELL. Well, thank you, Mr. Chairman, for having me here, and I will say with the tax burden at an all-time high, and April 15 just around the corner, the timing of this discussion couldn't be any better.
A super-majority amendment is needed to eliminate the existing bias in favor of bigger Government. Economists, political scientists, and other scholars, have long noted it is a natural for Government to expand because of the dichotomy, just explained by Professor Rappaport, between concentrated benefits and disbursed costs. Simply stated, the narrow portion of the population who take advantage of any given Government program have a strong incentive to lobby, to create or expand benefits, but the average taxpayer, whose share of the program's costs may amount to only pennies per day, usually does not find it worthwhile to get involved on the other side of the issue. Well, you can correct this bias, by making it harder for the Government to gain control of resources; a Balanced Budget Amendment, for instance, makes it more difficult to finance additional Government spending by borrowing. The tax limitation amendment addresses the other side of the equation by making it more difficult to finance additional Government spending by taxing.
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There are three specific reasons—I'd like to briefly touch on why a super-majority amendment is desirable. First reason is economic growth. Our Nation's history offers a wonderful test every time we raise tax rates, as we did in the 1930s, the 1970s, and so far, in the 1990s, our economic performance is below historical standards. On the other hand, every time we lower tax rates, as we did in the twenties, the sixties, and the eighties, our economy performs above par.
Second reason is the balanced budget. Even though the President's budget falls far short of balanced, there is a consensus among policymakers that the deficit should be eliminated by the year 2002. In such an environment where policymakers find it difficult to finance additional spending by borrowing, there will be a natural inclination to try to finance that additional spending with taxes. A tax limitation amendment will ensure that future politicians cannot evade the intent of balanced budget requirements by replacing debt finance spending with tax finance spending. And by the way, parenthetically, I'll note that the higher deficits that Mr. Greenstein referred to in the future, as calculated by CBO, are due entirely to increases in projected levels of spending. The problem is entirely caused by spending, and I think the solution, properly, would be entirely focused on spending.
The third reason why we need the super-majority amendment is tax reform. The current tax code is fatally flawed, and there's a growing bipartisan consensus for tax reform. Any move to a simple and fair system, like the flat tax, should be accompanied by binding restrictions on higher tax rates. We saw, after the 1986 Tax Reform Act, for instance, that politicians weren't willing to keep the deal they made with the American people of exchanging lower rates for a broader base. If we move to tax reform, we should make sure that that possibility does not exist—once the base is broad—politicians coming in and raising rates.
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And by the way, both Congressman Armey, the House Majority Leader, and the Ways and Means Chairman, Bill Archer, are satisfied that the language of this amendment does not interfere with a move to a flat tax or a sales tax, and if they're happy, I'm happy.
Finally, critics charge that the super-majority requirement would be a risky, untested idea. This accusation is false. Several States have super-majority requirements, and while several of those States have only adopted those requirements recently, there have been seven States that have had super-majority since at least 1980.
And if you look at these States—Arkansas, California, Delaware, Florida, Louisiana, Mississippi, and South Dakota—the evidence shows that, on average, super-majority States have smaller tax and spending increases; they grow faster; they create more jobs, and they accumulate less debt. Now, supermajorities, needless to say, are just one of many factors that influence these States' performance, and not every super-majority State beats the average in every one of these categories. Nonetheless, it does stand to reason that these States do have better performance, in part, because it is harder for Government to expand and taxes to be raised in those States.
I'll simply note, quickly, that States with super-majority saw their per capita tax collection jump by 102 percent between 1980 and 1992, which might be high, but lower than the 121 percent increase in States without supermajorities during that period of time. Spending increased by 132 percent in super-majority States, compared to 141 percent in non-super-majority States. Gross domestic product grew 43 percent, between 1980 and 1992 in super-majority States, compared to only 35 percent in States without supermajorities. And jobs, total employment, increased by 26 percent in super-majority States over the period, compared to 21 percent in States without supermajorities.
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And then, finally, one of the tidbits that I find the most interesting is that States with supermajorities actually had a smaller increase in the amount of State debt than States without supermajorities, thereby, I think, deflecting one of the criticisms that this would somehow prevent us from engaging in proper and necessary reductions in deficit spending.
Well, if empirical data from the States suggests that super-majority requirements serve their intended purpose, and given that we want to balance the budget and reform the tax code, it strikes me that there really is no good reason, unless we want bigger Government and higher taxes, why one would want to oppose a super-majority requirement. We have this good evidence on the State level. If Federal lawmakers approve a similar amendment imposing a similar requirement on the Federal level, there is every reason to expect similarly positive results.
In conclusion, I applaud the committee for addressing this critical issue, and will be happy to answer any questions.
[The prepared statement of Mr. Mitchell follows:]
PREPARED STATEMENT OF DANIEL J. MITCHELL, DANIEL J. MITCHELL, MCKENNA SENIOR FELLOW IN POLITICAL ECONOMY, HERITAGE FOUNDATION
Mr. Chairman, it is an honor to appear before this subcommittee to discuss the proposed amendment to the Constitution that would require a supermajority vote to raise taxes. With the tax burden at an all-time high and April 15 just around the corner, the timing of this discussion could not be any better.
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A supermajority amendment is needed to help eliminate the existing bias in favor of bigger government. Economists, political scientists, and other scholars have long noted that it is a natural tendancy for government to expand because of the dichotomy between concentrated benefits and dispersed costs. Simply stated, the narrow portion of the population who take advantage of any given government program have a strong incentive to lobby to create or expand benefits, but the average taxpayer, whose share of the program's costs may amount to only pennies per day, usually does not find it worthwhile to get involved on the other side of the issue.
One way of correcting this bias is to make it harder for government to gain control of resources. A balanced budget amendment, for instance, makes it more difficult to finance additional government spending by borrowing. The tax limitation amendment addresses the other side of the equation, by making it more difficult to finance additional government spending by taxing.
There are three specific reasons why a tax limitation amendment would be a valuable addition to the Constitution:
(1) Economic growth—Congress should make it harder to raise taxes in order to protect citizens from policies that would stunt growth and hinder job creation. Throughout our nation's history, periods of higher tax rates have been associated with subpar economic performance. Herbert Hoover's decision to raise tax rates in 1930, combined with other expansions of government, helped usher in a prolonged period of stagnation throughout the decade of the 1930s. Bracket creep in the 1970s doubled marginal tax rates for average Americans, contributing to a decade of stagnation. Record tax increases in 1990 and 1993 have stunted the economy's growth so far this decade, with 2 percent average annual growth rates that are well below the 3.1 average growth rate the economy enjoyed from the end of World War II to the end of the Reagan era.
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(2) Balanced budget—Even though the President's budget falls far short of balance, there is a consensus among policymakers that the budget deficit should be eliminated by 2002. Moreover, this consensus eventually may be fortified by approval and subsequent ratification of a balanced budget amendment. In such an environment, where lawmakers find it difficult to finance spending with debt, there will be a natural inclination to finance spending with taxes. A tax limitation amendment will ensure that future politicians cannot evade the intent of balanced budget requirements by replacing debt-financed spending with tax-financed spending.
(3) Tax Reform—The current tax code is fatally flawed and there is growing bipartisan support for sweeping tax reform. Any move to a simple and fair tax system like the flat tax, however, should be accompanied by binding restrictions on higher tax rates. Failure to approve a supermajority requirement could cause a repeat of what happened after the 1986 Tax Reform Act, when lawmakers reneged on the lower rates/broader base deal by raising rates in 1990 and 1993.
Finally, critics charge that the supermajority requirement would be a risky, untested idea. This accusation is false. Many states require at least a three-fifths vote of lawmakers to raise some or all taxes, and the evidence from the seven states that had such limits between 1980 and 1992 is that supermajorities are associated with superior economic performance and increased fiscal responsibility (several states have added supermajorities since 1992).
In these states—Arkansas, California, Delaware, Florida, Louisiana, Mississippi, and South Dakota—the evidence shows that, on average, supermajority states have smaller tax and spending increases, grow faster, create more jobs, and accumulate less debt. Supermajorities, needless to say, are just one of many factors that influence these states' performance, and not every supermajority state beats the average in every category. It stands to reason, however) that making it harder to raise taxes would be at least partially responsible for these good numbers.
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SUPERMAJORITY STATES CONTROL TAX BURDEN
On average, states with supermajorities saw their per capita tax collections jump by 102 percent between 1980 and 1992. This is too high, but it is much better than the average 121 percent increase in per capita tax collections that occurred in states without these supermajority protections. In other words, the tax burden rose nearly 20 percent faster in states that did not limit the ability of politicians to raise taxes.
LOWER SPENDING INCREASES IN SUPERMAJORITY STATES
In the supermajority states, per capita state spending on average increased by 132 percent between 1980 and 1992. While this is hardly a record to be proud of, states without supermajority tax requirements experienced average total per capita spending increases of 141 percent. This difference may not be very large, but taxpayers are grateful for even modest improvements in their state's fiscal performance.
SUPERMAJORITY STATES GROW FASTER
Lower taxes and lower spending are desirable, but the real reason for controlling the size of government is to promote prosperity. Not surprisingly, a supermajority is associated with faster economic growth. States with restrictions on the ability to raise taxes grew by an average of 43 percent in real terms from 1980 until 1992. States that made it easier for politicians to raise taxes, by contrast, only grew on an average of 35 percent during the same period.
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SUPERMAJORITY STATES CREATE MORE JOBS
The combination of smaller government and faster growth in supermajority states means that there is more money available for the productive sector of the economy. This means more jobs. In states with supermajorities, total employment increased by an average of 26 percent between 1980 and 1992. In states that allow taxes to be raised by a simple majority, on the other hand, the number of jobs increased by an average of only 21 percent.
SUPERMAJORITY STATES INCUR LESS DEBT
One of the criticisms of supermajority requirements is that politicians would not have the power to raise taxes in times of fiscal crisis, thus subjecting state residents to higher levels of debt. Evidence from the states, however, appears to dispel this fear. In the seven states with supermajorities, state debt increased by an average of 271 percent between 1980 and 1992. This is not a good track record, but states without limits on higher taxes saw average debt increases of 312 percent in the same period.
CONCLUSION
Empirical data from the states suggests that tax supermajority requirements serve their intended purpose—helping to limit the growth of government and enabling a more rapid pace of economic growth and job creation. To be sure, a supermajority requirement does not guarantee sound economic policy. The record tax increase approved several years ago in California, for instance, was enacted in spite of a two-thirds majority requirement. And many states without supermajority requirements, such as Tennessee and Nevada, scored well in most categories (not surprisingly, the lack of a state income tax seems to be associated with more growth and less government). Nevertheless, examining the performances of states with and without supermajority seems to confirm the well established relationships between sound fiscal policy and good economic performance. If federal lawmakers approve an amendment imposing a similar requirement on the federal level, there is every reason to expect positive results.
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In conclusion, I applaud the Chairman for addressing this critical issue, and will be happy to answer any questions.
The Heritage Foundation is a non-profit educational, public policy research organization operating under section 501(c)(3) of the Internal Revenue Service Code. It is privately supported, and receives no funds from any government at any level, nor does it perform any government or other contract work.
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INSERT OFFSET RING FOLIOS 2 TO 6 HERE
Mr. HUTCHINSON. I thank the panel, and I now recognize the ranking member, Mr. Scott, for 5 minutes.
Mr. SCOTT. Thank you, Mr. Chairman. I have a number of questions on how this would be implemented, and what's a tax and what isn't a tax.
Mr. Miller, you were in the OMB during the administration—were there ever disagreements between OMB and CBO on the outcome of particular legislation?
Mr. MILLER. Many times.
Mr. SCOTT. And how were these disagreements resolved?
Mr. MILLER. They were never—seldom resolved. They had different estimates.
Mr. SCOTT. Well, in this we have, I think the term is, increase in the internal revenue. If OMB and CBO can't decide whether or not the internal revenue will be increased, who would decide?
Mr. MILLER. Well, my presumption is that the implementing legislation, referred to in the draft language for the amendment, would specify that, and I would presume Congress would probably say it would be CBO's role, not the OMB's role.
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When you put in the Constitution, you can put it however you like, and of course, you have a big debate over whether CBO's—GAO could make a determination that the President had to follow. In the Gramm-Rudman-Hollings law that was challenged by Mr. Synar before the Supreme Court, who knew that the separation of powers could not allow that. But you could write it in the Constitution. I would presume Congress would have CBO make the determination of joint tax; it's up to you.
Mr. SCOTT. Let me ask the other panelists how that would—how they think that it might ever be resolved. The difference between OMB and CBO, as to whether or not, a particular bill will, quote, ''increase'' the internal revenue—anybody want to comment?
Mr. MITCHELL. I'll simply note that revenue estimating is a very imprecise process, and all we can hope for over time is that the process will be refined and improved, because I have to admit I have some reservations; I think a flat tax would increase Government revenue over the long-term because of the substantially faster growth that would result. You know, should that be used as a reason to require two-thirds vote?
Mr. SCOTT. Let me follow up on that answer, because Mr. Miller, I think, suggested that we ought to have a present-value calculation, not this year, next year. Should that be in the constitutional amendment, so we know what we're talking about, so you can't pick the methodology to suit your particular purpose?
Mr. MITCHELL. Well, I have faith that the committee will look at these issues and come up with what is the fair and neutral and impartial way of addressing these things. And the language of the amendment, as I read it, I think, doesn't have a particular axe to grind.
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Mr. RAPPAPORT. I have two points. First, I think that the possibility of disagreements between OMB or CBO would need to be addressed in the implementing legislation; either OMB or CBO would make the final decisions.
One way to deal with the problem of manipulating scoring methods is to prevent a law that would change a scoring method from taking effect until 2 years have passed. In that way, Congress could change scoring methods if it wanted to, but it couldn't do so for short-term benefits, such as deeming a tax increase not to be one. There are various ways to deal with some of the problems that arise from scoring. Although scoring has some problems, it's better to use scoring than the alternative, which would require revenue neutral flat taxes to secure a super-majority.
Mr. SCOTT. Sam.
Mr. THOMPSON. Thank you, Congressman Scott. Let me just point out that no matter how this provision in the constitutional amendment—''in the reasonable manner prescribed by law''—is drafted into positive legislation, whether it's the CBO or the OMB, there are going to be mistakes in the revenue estimates. Somebody's going to mess up—you know, not deliberately, but someone's going to mess up; they just aren't going to get the legislation right. There is going to be a time when you're going to expect that the legislation is going to be revenue neutral, and it's going to end up with a huge deficit. The Congress is going to be searching for revenues to close that deficit. And they're going to come back to Congress, and the special-interest groups are going to be standing there saying, ''Hey, you can't take us up unless you get 66 2/3 in both houses—that's the unlevel playing field.
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Mr. SCOTT. Okay, do others want to respond?
Mr. GREENSTEIN. Let me just quickly add to what the Dean said. I think it's not simply a matter of a revenue estimator making a mistake. But we know that on both the spending and tax side that often estimates that are correct in the initial years turn out not to be correct farther down the line, when the beneficiaries find ways to maneuver around the legislation. This can happen on the spending side, as when States found ways in the early 1990s to extract more Federal funding out of Medicaid; Congress had to come back and pass legislation to close that loophole down. It happens on the tax side when legislation is passed to have a certain effect, and a few years down the road, clever tax lawyers find a way to round it and the knowledge of that maneuver begins to spread. This happens on both the spending and the tax side.
So that estimates that may initially be correct that a provision has a certain revenue effect over time, we often find that there are revenue losses as people find holes in them. And I think what both Dean Thompson and I are saying is that you have a majority to pass the original legislation, then you'd have two-thirds to come back and fix the unintended side effect.
Mr. SCOTT. Let me ask, real quickly—we have taxes and fees. ''Increase the internal revenue,'' would fees be included in that term or not?
Mr. MITCHELL. I assume that the general consensus which exists now would be the proper one. If you're forced to do it, it's a tax. On the other hand, if you're going into Yellowstone Park, that's a voluntary exchange. On the issue of Medicare Part B premiums——
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Mr. SCOTT. What about an airline fee?
Mr. MITCHELL. If you have an airline ticket tax, that's a tax. On the other hand, if you did something where you privatized FAA and set up a separate corporation, and they had a user fee on—that would be an internal business decision, not a tax.
But I'll simply note on the Medicare Part B issue, Medicare Part B is voluntary; you don't have to participate in it, and so if they want to increase the premiums—which I might not think is all that wise of a policy; it might be a good policy;I don't know—but because it's a voluntary program, I would assume that would not fit under the definition of a tax.
Mr. SCOTT. I have a little trouble differentiating somebody voluntarily getting on a plane and paying a user fee and somebody voluntarily going into Yellowstone Park and paying a user fee—it is different, but——
Mr. MITCHELL. Well, in some sense, we all voluntarily choose to work, instead of not working, and so, is the income tax voluntary?
Mr. HUTCHINSON. Without objection, the gentleman will have an additional 2 minutes.
Mr. SCOTT. Thank you, Mr. Chairman. Mr. Poulson—Dr. Poulson.
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Mr. POULSON. I just want to make a brief comment about some of the conjectures about the disastrous things that are going to happen if this amendment is passed, and again, Colorado has had this kind of constraint for two decades; that is, we've had a super-majority vote for a couple of decades now. In that period of time, we passed a flat tax; we've broadened the tax base; we've closed loopholes. Our flat tax is a more progressive tax than the older graduated rate tax that we had. We've made the distinctions between user fees and revenues. We have resolved all these issues. I encourage the Congress to look at the experience——
Mr. SCOTT. I think we can all agree that this might work, and in certain States can work.
Mr. POULSON. Well, my point is that it has worked in not only Colorado, but in 22 States.
Mr. SCOTT. And, in some places it has worked. The question is whether or not it's good policy and might not work.
Mr. POULSON. I agree. I think that my—the taxpayers that I talk to look at the Congress trying to make fiscal decisions without a fiscal constitution—sort of like sending your kid to college with a credit card; there's no way that you can control expenditures.
Mr. SCOTT. Well, there's nothing in this bill that restrains spending.
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Dean Thompson.
Mr. THOMPSON. Thank you, Congressman.
I would just like to say that I used to live in California. I lived in California for four and a half years; it's a great State. It has one of these limitations, and I think that I would urge the committee to take a close look at what's happening in California. While I haven't studied it closely, I think that the educational system in California is falling apart, largely because of the tax limitation there.
We had two points: one on States, one on Medicare.
On States, 7 States have a general requirement for two-thirds to raise taxes; 43 do not. In those that do—I presume Colorado is one of them from the comment—I think the situation is not at all comparable to what the Federal Government faces in future decades. It is the Federal Government that has taken on the major responsibility for the health care and retirement needs of the elderly when they reach old age. Because of the retirement of the baby boom generation, we face unprecedented deficits in the years to come of an enormous magnitude that is not comparable to anything States are faced, and that needs to be taken into account in charting fiscal policy and not tying us in knots so that certain kinds of measures that could be needed to do responsible fiscal policy can be achieved only by a two-thirds majority.
In the Medicare area, I did not refer to a general increase in Medicare premiums. I referred specifically to an increase in Medicare premiums for more affluent seniors. In order to do that, one has to know who the more affluent seniors are. Social Security offices, which run Medicare, have no information on the current income of beneficiaries. That information is readily provided through the tax code, and virtually everyone who has studied this has concluded that the only efficient way to do a means test of premium in Medicare is to collect it through the tax code.
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Having said that, the provision in the Republican budget that came to the floor of the House in November 1995, which did not explicitly use the tax code to collect the income test of premium, still resulted in an opinion from the House Parliamentarian that this could be seen as constituting a tax increase. So I think the point stands on Medicare.
Mr. SCOTT. Thank you for your indulgence, Mr. Chairman.
Mr. HUTCHINSON. Thank you, Mr. Scott.
I'm going to come to you, Mr. Miller, and you'll have some chance to elaborate on this, but let me kick it off here—I think this is a good policy debate, and I appreciate everyone on the panel that is expressing their viewpoint. I'm always a little bit troubled—and you can respond to this, if you wish—about people taking a proposed constitutional amendment and saying it may or may not work from the standpoint of implementing the specifics of it, because as I understand it, we adopt a constitutional amendment, it is ratified by the States, and then it's up to Congress to adopt some implementing legislation that would make the process more clearly defined and give us a better road map. Obviously, we're going to have to sort through a number of things.
Mr. Miller—and you can respond more broadly, if you wish—but one thing that you raised a concern about was the di minimis standard; you'd just as soon that language not be in there, which I have some sympathy to, but is there any other language that could be put in here that would either make it tighter and more helpful, or provide some flexibility?
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Mr. MILLER. Just drop it. I don't see why you just don't drop it. [Laughter.]
One restraint is current revenue plus one-tenth of 1 percent; the other is restrained as current revenue. I don't see that it offers you any flexibility, and imagine, as I said in my testimony, the competition to see who is going to get that extra little one-tenth of 1 percent each year, because I suspect that would be the case.
Let me say, in response to the Dean's point, there are other reasons that you might find yourself at the end of the year with unanticipated shortfall in revenue vis-a-vis outlays. If the economy turns down, that's going to adversely affect revenue receipts, and it will increase outlays because of safety net programs. So there are a number of things, not just the question of making mistakes in estimating the effects of a policy change on tax revenue.
But, I must say, I'm sitting here thinking, and hearing some very well-reasoned criticisms or pointing to shortcomings—I did in my own testimony—of the TLA approach, but it seems to me like two things: one, we're talking about small items. The question is, Do you believe that there's inherent bias toward too big a government and too much taxes? And I think most American people would say, yes, and the only way to address that is to change the Constitution. The only fundamental reform to me is changing the Constitution.
And the other part is that I used to—in my OMB days—be talking about making change and we'd sit around and debate issues, and some fellow that had been working for the Government for some time said, ''Jim, you got to understand, there are two kinds of lawyers; there are red-light lawyers and green-light lawyers.'' I think we need some more green-light lawyers to figure out ways to make this work. [Laughter.]
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Mr. HUTCHINSON. We've got some good law professors here; maybe they can produce some green-light lawyers. [Laughter.]
Anyone else want to add a comment on that particular subject?
Mr. MITCHELL. Well, on the whole issue of whether or not we should make the perfect the enemy of the good. If my memory serves me correctly, the Supreme Court will shortly be hearing a case on the constitutionality of the Communications Decency Act. Can you imagine if the Founding Fathers, first of all, knew about what would happen in the future, knew that there would be something like the Internet and computers, and someone would have said at the Constitutional Convention: Well, we really can't draft this First Amendment the way it is because we don't know exactly how it will be implemented with regards 220 years—or whatever it is—in the future to the Communications Decency Act? I mean, to some degree, I think we have to have faith in our process where we have Congress writing the legislation to implement the amendment, and we have the courts overseeing exactly what it means. I mean it seems to have worked fairly well with the First Amendment for 200-plus years. So I can't see why we would want to frighten ourselves by hypotheticals with regards to a tax limitation amendment.
Mr. SCOTT. Mr. Chairman, I'd point out that we have several constitutional amendments pending on the First Amendment, so——[Laughter.]
Mr. HUTCHINSON. That I hope will not be adopted. [Laughter.]
Mr. HUTCHINSON. Mr. Greenstein.
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Mr. GREENSTEIN. Well, I just can't help noting, after Dan's comment, that if we're talking about the Founding Fathers and what we've done for 200 years prior to the Constitutional Convention, we actually had a super-majority requirement of sorts; the Articles of Confederation required the vote of 9 of the 13 States to raise revenue. It was at the Constitutional Convention that the Founding Fathers found that to be unworkable and wrote in the majority requirement that we have lived with for the past 200 years.
Mr. RAPPAPORT. As long as we're going to talk about constitutional history, the original Constitution did not really give the Federal Government the power to raise income taxes. We needed the 16th Amendment for that. Once that passed, we got a completely different scheme than the Founding Fathers had envisioned, and that's one of the reasons why we need some restraint now.
Mr. MILLER. That's right. That's one of the problems; that's one of the reasons I said that this problem had emerged since the Founders.
Mr. HUTCHINSON. I just wanted to mention one other thing. Dean Thompson talked about—I think I've got it right; I could be wrong—but that there's a lot of pressure whenever it comes to Medicare and Social Security that, rather than raising revenues, the temptation of pressure will be to cut Social Security and Medicare. Was that your point, Dean Thompson? Or that might have been someone else's. Excuse me, Mr. Greenstein.
Mr. THOMPSON. I didn't make that point explicitly, Mr. Congressman.
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Mr. HUTCHINSON. But you'd adopt it by reference. [Laughter.]
Mr. THOMPSON. Yes, I would.
Mr. GREENSTEIN. I had two parts to that point. The other part of the point was some of the measures one would want to adopt; for example, the only group of American workers that as a large group is left out of the social security system are certain groups of State and local employees. There is pretty much of a consensus among Social Security analysts, be they conservative or liberal, that that ought to be changed. Changing that raises payroll tax revenues which improves the solvency of the social security trust fund, but under this amendment would require a two-third's vote.
Mr. HUTCHINSON. My point would be that there is a tremendous amount of public pressure not to reduce spending on Medicare and Social Security. As Members of Congress we will have to debate, and to determine whether the pressure is to go the two-thirds level to raise revenues. That's what Congress is all about. So, I don't think you necessarily have to say that there would be cuts in Medicare and Social Security.
Mr. GREENSTEIN. I was making reference to two points; let me elaborate on one. One was that it would increase the pressure on Social Security and Medicare, and I think that's undeniable if it were harder to raise revenues. There is, of course, another possible outcome, and that is, we couldn't raise revenues because there was a two-thirds limitation; Social Security and Medicare were not changed beyond what was needed for balance because of the popularity of those programs, and given the long-term fiscal forecast, much of the rest of the Federal Government disappeared. Now, some who favor the amendment would like to see that, but I think such a choice ought to be made on its own merits by a majority vote, not constrained by super-majority limitation.
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Mr. HUTCHINSON. I am going to recognize Mr. Scott for an additional 2 minutes. Mr. Inglis? Okay, Mr. Scott.
Mr. THOMPSON. Mr. Chairman——
Mr. HUTCHINSON. He'll probably give you a chance to respond on that.
Mr. SCOTT. Let me just ask a couple of quick questions. Jim, you mentioned one-tenth of 1 percent of a $1.5 trillion budget—in my little arithmetic, that's a billion and a half—what do they say? A billion here, a billion there; you're still di minimis? [Laughter.]
Mr. MILLER. No.
Mr. SCOTT. Is there any question that closing loopholes would be an increase in the internal revenue? No one doubts that? On the——
Mr. MILLER. I have no brief or so-called loopholes, but you simply change the tax law to reduce revenues somewhere else; it's easily offset.
Mr. SCOTT. Capital gains tax cut that increases for those that believe in supply-side economics, is a capital gains tax cut an increase in the internal revenue?
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Mr. MILLER. Yes, I think so.
Mr. RAPPAPORT. That is true, although it's not 100 percent clear on the language here. In my written comments, I recommend that a bill that imposes a new tax, raises a rate, or expands the base, should require a super-majority ''unless'' it is revenue neutral. So, therefore, a bill that cut the capital gains tax would not require a super-majority, and you'd still not require a super-majority for revenue-neutral flat taxes.
Mr. MILLER. If I could answer Mr. Scott's earlier question; right now, the static analysts tend to carry the day, in part because they're risk-averse. I mean, it's easy to do static analysis; it's hard to do dynamic analysis, and you're not criticized as much if you do static analysis and you're wrong, as if you do dynamic analysis. If this controversy is resolved more toward the dynamic analysis—which I believe is appropriate—I think cutting the capital gains tax rate would increase revenue, but that's not to say Congress wouldn't do it, or would have to have a two-thirds majority to do it, because if you're faced with an opportunity to cut the tax rate of capital gains to increase economic growth revenue would increase in part because there would be great increase in economic growth. I would hope that Members of Congress would think that's a good deal, reduce tax rates elsewhere, reduce the tax rate on capital gains, generate a lot of economic opportunity and growth. That would be a plus—a win-win.
Mr. SCOTT. And, therefore, it would require a two-thirds vote, but we should do it?
Mr. MILLER. No, no.
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Mr. MITCHELL. If I could jump in here, I think there's an easy way out of it. You mention people who believe in supply side economics. Let me cite the Clinton administration and the debate over proving the GATT language, the world trade agreement. The administration properly argued, made the supply-side argument, that lowering import taxes would help the economy grow, and, therefore, Congress shouldn't be that worried about the static revenue loss from the lower import taxes. But let's say that they did do dynamic analysis and they concluded that you would actually have an increase in revenue under the bill that was passed that accompanied the GATT treaty. Well, you can simply add a tax cut into the bill so that, even on a dynamic forecast, it's not an increase in tax revenue. So I'll hardily embrace the supply-siders at the Clinton administration to have made that point. [Laughter.]
Mr. HUTCHINSON. Mr. Greenstein.
Mr. GREENSTEIN. Let me add that there's a serious fiscal danger here. Many proposals that cut taxes and are constructed in a way that they increase revenue in the short term, you get an increase in the early years of indexing capital gains. You can do an individual retirement account tax cut—we won't go into all of the details that allows a certain transfer of money from old IRAs to new IRAs, and you get revenue increases in the short-term. Many of these provisions lose revenue in the long-term. Some of the increase in revenue in the short-term from capital gains comes from asset sales that are done sooner rather than later.
If you end up having a provision that is constructed in such a way that it raises money in the short-term, loses it in the long-term, you do other tax cuts so that the short-term picture doesn't raise revenue and doesn't require a two-thirds vote, and you get 10 or 20 years down the road, and both your tax cut and your offset are both revenue losers, and the Nation's fiscal hole deepens. I think this is yet another reason why this is not a wise path to follow.
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Mr. SCOTT. We've kind of inferred it, but am I getting the idea that if you have a bill that increases some taxes and decreases other taxes, but the bill is revenue neutral, that would not trigger the two-thirds——
Mr. THOMPSON. That, Mr. Congressman, is not clear from the language of the bill. That's probably the correct interpretation, but it's not clear.
Mr. SCOTT. Thank you, Mr. Chairman.
Mr. HUTCHINSON. I thank Mr. Scott and——
Mr. SCOTT. Did you—does anybody else have any—quickly?
Mr. THOMPSON. I would just like to answer the question that the chairman directed to me by a little example, sir.
Let's assume we have in the internal revenue code today something called accelerated appreciation that companies can take, which is a tax expenditure, tax benefit. So IBM get's accelerated depreciation on all of its equipment that it uses to make its computers and the like, and we also have this debate about Social Security and whether the CPI is providing for excessive Social Security benefits. Let's assume that there's a strong basis for, one, reducing the amount of accelerated depreciation for the IBMs of the world, and also, let's assume that there is a good basis for lowering the CPI index for all of the Social Security recipients in the country. One of those requires only a 50 percent—51 percent—vote; that is the reduction in the Social Security benefits. The other requires, under this amendment, a two-thirds vote in both Houses of Congress. What's the justification for requiring a two-thirds vote to reduce IBM's accelerated depreciation, while you only require a 51 percent vote to decrease an individual's social security payment? To me, it's just screwy.
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Mr. HUTCHINSON. Mr. Miller, would you respond to that?
Mr. MILLER. Well, let me say, again, the question is the bias toward larger government and to constrain taxes will constrain larger government, and as Dan Mitchell pointed out, constrained taxes will increase aggregate economic activity.
In terms of offsetting tax provisions, it seems to me that this language here's pretty clear: section 1, a bill to increase the internal revenue shall require for final adoption, et cetera. Most tax bills are part of what's called the reconciliation bill. It's a single bill—as you know, almost every reconciliation bill has provisions that raise tax revenue and provisions that lower tax revenue, but it's a single bill. If there's any question, if you have two separate adjustments, you put them in the same bill. I mean there's——
Mr. HUTCHINSON. It's the net result.
Mr. MILLER. It's the net result. It's the revenue, the whole internal revenue, that is the question; that is the measure here. Don't you agree, Dean?
Mr. THOMPSON. No, I don't agree. I don't agree. I think that this is focusing simply on the tax side and not the expenditure side.
Mr. MILLER. Oh, it is the tax side, not the spending side.
Mr. THOMPSON. But let's assume that we have a bill that simply has one tax increase in it; that is the reduction in accelerated appreciation, and we have on the expenditure side, a modification in the Social Security—in the CPI. In that case, you got a majority vote on the one, and you got a two-thirds vote required on the other.
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Mr. MILLER. But I suspect that Members of Congress would strip that out and vote them separate up or down. I mean, that's always——
Mr. THOMPSON. But, sure, that's probably what they would do.
Mr. HUTCHINSON. Let me bring us back to order here.
Mr. MILLER. I'd like the super-majority to increase spending, too. [Laughter.]
Mr. THOMPSON. That's what they would do, and you might get the reduction in the CPI, but IBM would fight hard to prevent the reduction in the——
Mr. HUTCHINSON. I've allowed some flexibility in the hearing today because I felt it was good to have an open discussion on this, but we're going to conclude the hearing at this point.
I want to thank each of the panel. I know that you came some distance and at some effort, and I think it's very important to make the record clear on this important policy issue.
At this time the meeting will be adjourned.
[Whereupon, at 11:08 a.m., the subcommittee adjourned.]
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54–049
1999
PROPOSING AN AMENDMENT TO THE
CONSTITUTION WITH RESPECT TO
TAX LIMITATION
HEARING
BEFORE THE
SUBCOMMITTEE ON THE CONSTITUTION
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
FIRST SESSION
ON
H.J. RES. 62
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MARCH 18, 1997
Serial No. 72
Printed for the use of the Committee on the Judiciary
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
STEVEN SCHIFF, New Mexico
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB INGLIS, South Carolina
BOB GOODLATTE, Virginia
STEPHEN E. BUYER, Indiana
SONNY BONO, California
ED BRYANT, Tennessee
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STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRISTOPHER B. CANNON, Utah
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
CHARLES E. SCHUMER, New York
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
THOMAS E. MOONEY, Chief of Staff-General Counsel
JULIAN EPSTEIN, Minority Staff Director
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Subcommittee on the Constitution
CHARLES T. CANADY, Florida, Chairman
HENRY J. HYDE, Illinois
BOB INGLIS, South Carolina
ED BRYANT, Tennessee
WILLIAM L. JENKINS, Tennessee
BOB GOODLATTE, Virginia
BOB BARR, Georgia
ASA HUTCHINSON, Arkansas
ROBERT C. SCOTT, Virginia
MAXINE WATERS, California
JOHN CONYERS, Jr., Michigan
JERROLD NADLER, New York
MELVIN L. WATT, North Carolina
KATHRYN HAZEEM LEHMAN, Chief Counsel
KERI D. HARRISON, Counsel
JOHN H. LADD, Counsel
ROBERT J. CORRY, Counsel
C O N T E N T S
HEARING DATE
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July 14, 1997
OPENING STATEMENT
Canady, Hon. Charles T., a Representative in Congress from the State of Florida, and chairman, Subcommittee on the Constitution
WITNESSES
Greenstein, Robert, Executive Director, Center for Budget and Policy Priorities
Miller, James C., Counseler, Citizens for a Sound Economy
Mitchell, Daniel, McKenna Senior Fellow in Political Economy, Heritage Foundation
Poulson, Barry W., Professor of Economics, University of Colorado
Rappaport, Michael, Professor, University of San Diego School of Law
Shadegg, John B., a Representative in Congress from the State of Arizona
Thompson, Samuel C., Dean, University of Miami School of Law
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
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Greenstein, Robert, Executive Director, Center for Budget and Policy Priorities: Prepared statement
Miller, James C., Counseler, Citizens for a Sound Economy: Prepared statement
Mitchell, Daniel, McKenna Senior Fellow in Political Economy, Heritage Foundation : Prepared statement
Poulson, Barry W., Professor of Economics, University of Colorado: Prepared statement
Rappaport, Michael, Professor, University of San Diego School of Law: Prepared statement
Shadegg, John B., a Representative in Congress from the State of Arizona: Prepared statement
Thompson, Samuel C., Dean, University of Miami School of Law: Prepared statement
(Footnote 1 return)
For more information on this research project visit us on our web site: hhtp://www.colorado.edu/Economics/taxpolicy. You may also contact me at: Barry W. Poulson, Department of Economics CB256, University of Colorado, Boulder, CO 80309; phone: 303-492-7414; fax: 303-4920-8960; e-mail: Poulson@spot.colorado.edu.
(Footnote 2 return)
Barry W. Poulson, ''A Rent Seeking Model of TELs,'' with Jay Kaplan, Public Choice 79:117–134, 1994.
(Footnote 3 return)
Barry W. Poulson, ''Designing a State Fiscal Constitution,'' in Saving the States, American Legislative Exchange Council, Washington, DC, 1993.
(Footnote 4 return)
Neither CSE nor CSE Foundation accept any funds from the U.S. Government.
(Footnote 5 return)
The constitutional amendment would require a two-thirds vote in each House to enact legislation that increases ''internal revenue.'' While that phrase is ambiguous, it should be noted that the Internal Revenue Code covers individual and corporate income taxes; Social Security, Medicare, and other social insurances taxes; most excise taxes such as those on gasoline, alcohol, and tobacco; and gift and estate taxes.
(Footnote 6 return)
See, e.g., Akhil R. Amar, The Bill of Rights as a Constitution, 100 Yale L.J. 1131, 1147–52 (1991) (suggesting that the original purpose of the First Amendment was to permit popular majorities to bring pressure to bear on potentially unrepresentative national legislative majorities).
See John O. McGinnis, The Partial Republican, 35
(Footnote 7 return)
Michael T. Hayes, Lobbyists and Legislators: A Theory of Political Markets 91 (suggesting that concentrated interests and costs are more likely to generate political and lobbying activity by organized groups).
(Footnote 8 return)
See E. Donald Elliott, Constitutional Conventions and the Deficit, 1985 Duke L.J. 1077, 1090 (noting that government spending programs provide concentrated benefits while spreading the costs of programs over large and diffuse groups).
(Footnote 9 return)
The scenario is thus a specific example of the well-known paradox of vote trading. See William H. Riker & Steven J. Brams, The Paradox of Vote Trading, 67 Am. Pol. Sci. Rev. 1235, 1236 (1973) (stating that ''[t]his paradox of (vote trading] has the property, that, while each trade is individually advantageous to the traders, the sum of the trades is disadvantageous to everybody, including the traders themselves.'')
(Footnote 10 return)
It might be argued that the supermajority rule would actually give special interests greater power because special interests would need only two-fifths of a house to block legislation. The effects of supermajority rules on special interests will depend on the circumstances. While supermajority rules in some areas could give special interests even greater power, this is not true of a supermajority taxation rule. It has been our argument, which public choice theory supports, that special interests have generally exercised their power to secure benefits that have required increases in government spending and taxes. Because the supermajority taxation rule makes it more difficult for special interests to increase spending and taxes, it thus impedes the power of special interests.
(Footnote 11 return)
The Constitution is itself a societal precommitment to limit the range of future choices, because it is thought that choices prohibited by the Constitution will be generally socially disadvantageous. See Donald J. Boudreaux & A.C. Pritchard, Rewriting the Constitution: An Economic Analysis of the Constitutional Amendment Process, 62 Fordham L. Rev. 111, 123 (1993).
(Footnote 12 return)
See Jonathan R. Macey, Competing Economic Views of the Constitution, 56 Geo. Wash. L. Rev. 50, 57 (1987) (suggesting that the purpose of the Constitution was to guide transactions from public to private markets because private markets are better at creating wealth).
(Footnote 13 return)
Richard A. Epstein, Exit Rights for Federalism, 55 J. Law & Contemp. Prob. 147, 149 (Autumn 1992) (arguing that federalism is a check on the monopoly of government power because individuals can leave).
(Footnote 14 return)
Macey, supra note 8, at 76.
(Footnote 15 return)
For a discussion of the collapse of federalism of powers, see Richard Epstein, The Proper Scope of the Commerce Power, 73 Va. L. Rev. 1387 (1987).
(Footnote 16 return)
For a discussion of the collapse of the separation of powers, see Gary Lawson, The Rise and Rise of the Administrative State, 107 Harv. L. Rev. 1231 (1994).
(Footnote 17 return)
See Daniel Patrick Moynihan, Sick of Stockman and LaRouche, The New Republic, May 26, 1986 at 16 (observing that both Friederich Hayek and Moynihan believed that the deficits were ''deliberately created to force a great reduction in the size and activities of the federal government.'' Hayed approved of the strategy while Moynihan did not).
(Footnote 18 return)
For a discussion of the President's veto power, see Steven R. Calabresi, Some Normative Arguments for the Unitary Executive, 48 Ark. L. Rev. 23 (1995); Michael B. Rappaport, The President's Veto and the Constitution, 87 Nw. L. Rev. 735 (1993).