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New report highlights the need for state fiscal rules

Dec 11, 2020 by AFP

Every state should have a set of rules that guide and restrain taxing and spending. While important in the best of times, such rules are crucial in times like these, when the coronavirus pandemic and the accompanying lockdowns have strained state resources.

In a new report, Americans for Prosperity Senior Fellow Alison Acosta Winters lays out how states can make the best use of prosperous times to prepare for the kind of crises we’ve faced in 2020.

Her recommendations include:

  • Strict total spending limits that allow growth over time at a reasonable, limited rate.
  • A requirement for a budget that is balanced, at a spending level at or below the spending cap.
  • Regularly funding a revenue stabilization fund that could be tapped to meet the balance requirement if specific economic downturn criteria are met.
  • Requiring a supermajority and/or voter-approval for tax and fee increases.

Most important, perhaps, is a dedication to these principles from state legislators and governors, who too often ignore these kinds of rules that are already in place.

“Most states have tools that could lead to responsible fiscal policy, including balanced budget requirements, some form of tax expenditure and/or revenue limits, and rainy day funds,” Winters writes. “But they vary in stringency and have frequently been proven ineffective or even harmful at helping states implement sound policies or preparing for economic downturns.”

In short, fiscal rules should be strengthened to ensure lawmakers act more like the ants and less like the grasshoppers in the famous fable, acting prudently during flush fiscal times so there is plenty to use when disaster strikes.

“Fiscal policy should be sustainable over a full economic cycle — not just during periods of growth, but also during downturns.” Winters writes. “Reserve funds with strict and explicit requirements for regular contributions during growth years and restrictions that limit use of the funds to economic downturns are a key feature. If done right, this would provide lawmakers with better flexibility during recessions.”

Read a one-page summary here. Read the whole report here.