Revenues are not “going gangbusters,” as we used to say in the heady days of the housing market bubble. Rather, moderate revenue growth is exceeding the cautious forecasts of economists. It’s good the economists have erred on the low side. This is an important distinction, not understood (or reflecting feigned ignorance) by interests who want to either spend the extra money, or “give it back to the people” as tax cuts, as soon as possible.
California’s Governor Brown apparently doesn’t want to do either. He’s out front, advocating a “rainy day fund” to help the state smooth out its boom and bust cycles. “Good government” politicians, and the fiscal wonks advising them, have been advocating sound rainy day funds since feudal lords started collecting taxes in the middle ages, and realized their armies still needed to be fed and clothed when the crop was bad.
All states have something they call a rainy day fund, accompanied by some sort of spending or revenue limitation that’s designed to make money available for a reserve fund. Practically all such mechanisms have failed or fallen short. At best, they’ve worked well for two or three budget periods, before collapsing.
By proposing a limit on revenue, rather than a spending limit, Governor Brown is off to a good start. Spending limits are much more porous, leaky, and easier to game, than revenue limitations. Revenue limits work a lot better, simply because, as former Federal Reserve chief, William McChesney Martin, once remarked, “our main job is to take the punch bowl away just as the party is getting good.”
But, writing the full proof revenue limit isn’t easy either. Which of the vast array of state revenues are covered by the limit? Does it apply only to “new” revenue? What if the federal government increases it’s grants to the states, freeing up state revenue for other uses? Indeed, what is “revenue?” Or, what is a “tax?”
You can ruin a revenue limit pretty quickly by just calling a new tax “Gertrude” (or “Irving”) instead of a “tax.” Or you can tinker with the complex formula that’s supposed to channel excess revenue to the rainy day fund. A really easy way to undermine a revenue limit is to go on a tax cutting binge, as soon as the amount in the reserve becomes material. Or you can send the extra money back to the taxpayers. How many politicians can resist announcing that “a check is in the mail,” rebating your property taxes for the last year?
Tax rebates are actually better than cutting taxes, because tax reductions erode the tax base permanently. Then, using the reserve when its raining becomes irresponsible, because it’s not sustainable. Of course, why even go through all these maneuvers. All you have to do is suspend the formula that directs extra revenues to the reserve……”just this one time.” “Not to worry, we won’t do it again.” Or “we’ll do it till we need glasses.”
Easier still, is repealing the annoying revenue limit. After all, its just a law, like any other; there’s nothing to bind future Governors or Legislators. But how many voters will really care about the reserve when they’re getting more services or lower taxes? And, if your state has a really “progressive” initiative and referendum” process, any well funded interest group can gain voter approval to demolish the revenue limit or steal money from the rainy day fund.
1) The revenue limit, needs to be backed up by a simple requirement that a small percent (maybe 1%) of all forms of revenue — user fees, interest earnings, money from unclaimed properties, and even “Gertrude” monies – need to be deposited quarterly in the rainy day fund, no matter what, even during bad times. During bad times, you can take the money right out again, but it needs to go into reserve first, just like the automatic deposits you set up for your daughter’s college fund.
2) The 1% requirement, along with a (simple) rule governing when and how the money can be removed from the reserve and spent, also needs to be enshrined in the state constitution. Placing this sort of thing in the constitution is dreaded by some and laughable to others. But the whole point is to make it hard to evade.
3) Because the rule for when the money can be accessed needs to be relatively short and simple — you want to avoid a 10,000 word amendment to a constitution — it needs to be backed by a constitutionally enshrined body which interprets and applies the rule. Sure, that can make it porous again, but if this commission has equal membership from the two top caucuses in the state legislature, with the tie breaking member appointed by this initial group, there are a lot of protections.
4) And, the amount in the reserve needs to be capped – perhaps, at 5%, 7% or 10% of total revenue, so the politicians can experience the joy of sending a (one time) check in the mail (with their names on the signature line) back to the taxpayers. There’s got to be something in this for the politicians.
Is all of this hard and nerdy? It sure is. But it’s the only approach that has a chance of working. It just might provide a real reserve, if you can keep it.