Chairman Grove, members of the committee:
Thank you for the invitation to share views on tax reform.
I am Kurt Couchman, the senior fellow in fiscal policy at Americans for Prosperity. I am excited to be here, since I grew up in Pennsylvania and graduated from Indiana University of Pennsylvania and its Cook Honors College.
Pennsylvania is making important progress toward a more pro-growth tax code, especially through the phased reduction in the corporate net income tax.
For more than a decade, AFP-Pennsylvania has sought to streamline and simplify our tax code. Spending control and tax reform are central to our mission, and they are connected.
CNIT reform is making Pennsylvania more competitive, and we must also move to eliminate corporate welfare and related giveaways. Simplification by consolidating tax authorities would help level the playing field for individuals and businesses trying to anticipate their tax liabilities.
To accelerate and build on this progress, however, Pennsylvania will need better budgeting systems.
These systemic improvements can and should be board, bipartisan support. One is already practiced in so-called red, blue and purple states. The other is informally done in several American states and is formal policy in several other countries.
The first budget upgrade is structural balance. This means that the state’s budget would balance over the medium term instead of every year.
Structural balance has clear advantages over annual balance. Annual balance drives states into some combination of three bad choices: 1) major policy uncertainty and instability from trying to match spending to volatile revenue streams, 2) various juggling tricks to avoid balancing the budget, which looks shady and isn’t consistent with the rule of law and 3) vulnerability to new federal strings along with bailout money that undermines federalism.
Moreover, the governor’s office generates most of the new ideas for closing budget gaps or for spending extra revenue. Annual balance shifts power from the legislature to the governor. Even so, when annual balance started to be adopted in the 1840s, it was a clear improvement over the lack of rules that led to defaults by the territory of Florida and eight states including Pennsylvania.
Structural balance, on the other hand, can let spending policy ride smoothly over economic fluctuations, like a big ship does over the waves.
[Slide 1] Structural balances comes from limiting spending growth to the trend growth in the state economy. That helps prevent overspending during the boom years, when revenue growth is above trend. Those surpluses are then saved for a rainy day. When recessions come, the Commonwealth would have a robust reserve fund to draw from and avoid having to change policies dramatically. This graphic, by the way, comes from Switzerland, where the people approved a structural balance rule with 85% support in 2001.
[Slide 2] As this image shows, which is on your handout, structural balance – the orange line – means far less policy volatility than annual balance – the blue line. The blue line comes from the total revenue collected by all states over those sixty years. And both lines are inflation-adjusted, per-capita figures.
With structural balance, state policymakers would not need to dramatically change policy from year to year, nor would the legislature face such pressure to acquiesce to the governor’s proposals. Your members of Congress would be less inclined to support state bailouts and the strings that come with them, which is good not only for federal fiscal health but also for state sovereignty.
Let’s connect structural balance more explicitly to tax reform. On the one hand, policy stability would protect against recession-driven tax hikes because swings in revenue collections wouldn’t drive fiscal policy from year to year. My understanding is that a variety of small but durable tax increases tend to be enacted during most downturns in Pennsylvania.
On the other hand, the rule for structural balance provides ample time for legislators to plan. As we’ve proposed it, structural balance would let spending grow as fast as the rolling average of state economic growth over the prior five calendar years. There’s also a deficit brake to make sure spending and revenue trends stay together for the long run.
A string of good years in a row would produce the fiscal space to plan for and build political coalitions around the tax reforms that can unleash greater prosperity for all Pennsylvanians. This can also help drive better policies in health care, pensions, and other subject areas, which could in turn expand the room for further tax and other reforms.
Mr. Chairman, you may recall the model policy that I co-presented at the meeting for the American Legislative Exchange Council a few months ago, which the leaders approved a few weeks later. That proposal is the basis of a short paper that Americans for Prosperity published last week. I believe Pennsylvania Representative David Rowe intends to file related legislation, just as soon as that becomes possible here.
In addition, an earlier version of structural balance was part of a federal proposal for a balanced budget amendment offered in 2011. That proposal, the so-called Business Cycle BBA, had 45 Republicans and 14 Democratic cosponsors ranging from future House Freedom Caucus members to members of the Congressional Progressive Caucus and everywhere in between.
As you can see, structural balance can provide significant benefits for a better tax code over the current annual balance paradigm. Yet these benefits can be even greater along with another budgeting best practice.
The other budget upgrade that can help drive tax reform is comprehensive legislative budgeting.
Pennsylvania currently enacts 17 appropriations bills each budget cycle, not including any supplemental appropriations bills.
Yet those 17 bills only include about one-third of total state spending in Pennsylvania. It doesn’t include revenue policies. That shadow budget, as our friends at the Commonwealth Foundation call it, is out of sight, out of mind, and procedurally out of reach.
The legislatures of Maryland, Virginia and twelve other states have a single budget bill per cycle, some annual, some biennial. Not every state with one budget bill includes everything in that bill, however. Colorado does one bill but like Pennsylvania and West Virginia, the appropriations process includes only about one-third of spending. Tennessee, Wisconsin and North Carolina seem to be the most comprehensive.
Ideally, each state would include all spending and all revenue. “All spending’ includes not only the appropriations bills but also special funds, federal funds, and all other spending. “All revenue” includes tax bases, rates, exemptions, exclusions, credits, and deductions.
By putting all spending and revenue together, you can manage the entire budget. In fact, a budget, by definition, must include everything. It is understandable why policymakers would want to consider only part of the budget when annual balance drives such instability, but structural balance largely solves that problem.
Putting it all together lets you decide where to get the best value for the citizens of the Commonwealth. And what doesn’t provide value.
It provides greater means and motivation to do better. The means is a budget with every spending and revenue line item. Seeing where the money comes from, where it isn’t collected, and where is goes empowers legislators to consider tradeoffs in the full context of all fiscal policies.
The motivation is to preserve the highest priorities and to advance better outcomes for the state.
Rooting out low-value spending like corporate welfare and low-value tax carveouts through a comprehensive budget can create the offsets needed to reduce taxes that hold back opportunity and prosperity.
In some cases, simplification is more important than rate reduction, such as on the fairly low personal income tax. A budget that sets that rate and base next to myriad exemptions and overlapping tax authorities could facilitate clean ups that reduce the compliance burden. According to a 2017 Tax Foundation analysis, Pennsylvania had more than 3,000 local income tax jurisdictions – about 45 per county!
Finally, a comprehensive budget provides a regular opportunity for incremental change. An effort that falls short in one year can be tried again the next with whatever changes are needed to grow the coalition of support.
In conclusion, a comprehensive budget could produce impressive benefits for Pennsylvanians. The combination of structural balance and a comprehensive budget could do wonders not only for tax reform but also for better budget management and a stronger Pennsylvania General Assembly.
Thank you for your commitment to the Commonwealth. I look forward to discussing these issues further.
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