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Congress Examines Balanced Budget Amendment Proposals

WASHINGTON – The House Judiciary Committee recently revisited an idea circulating Capitol Hill for decades – an amendment to the U.S. Constitution requiring the federal government to balance its budget.

Bob Goodlatte (R-Va.), the panel’s chairman, said that Congress made a tragic mistake in March 1995 when it failed to pass a balanced budget amendment.

The constitutional amendment had the required two-thirds majority support in the House, but the Senate failed by one vote to send the amendment to the states for ratification.

“If Congress had listened to the American people and sent that amendment to the states for ratification, we would not be facing the fiscal crisis we are today. Rather, balancing the federal budget would have been the norm, instead of the exception over the past 20 years and we would have nothing like the annual deficits and skyrocketing debt we currently face,” Goodlatte said.

Constitutional amendments must get two-thirds majorities in both houses and be ratified by three-fourths of the states to take effect. Another method to amend the Constitution, through the state legislatures, requires that 34 states call for a constitutional convention. Twenty-two states have active applications calling for a convention to draft a balanced budget amendment, although some argue the number may be even higher if one counts the states that have rescinded their applications.

Goodlatte said he supports several versions of the balanced budget amendment that have been introduced this Congress.

One proposal, which is nearly identical to the amendment that the House passed in 1995, would mandate that total annual outlays not exceed total annual receipts. It would also require a majority in each chamber to pass tax increases and a three-fifths majority to raise the debt limit.

Another version of the amendment requires a three-fifths majority to raise taxes and imposes an annual cap on federal spending.

Rep. Justin Amash (R-Mich.) testified before the panel about legislation he has introduced that would balance the budget over the business cycle instead of every year, allowing for deficit spending during downturns, while providing “predictability and stability” in fiscal policymaking.

“When a recession hits, spending is still based on the pre-recession boom years. This higher spending and the recession-induced revenue drop can cause deficits. And that’s okay. As the economy recovers, spending begins to incorporate the recession-year revenue, producing small surpluses in the good years,” Amash explained.

The Amash proposal would limit outlays to the average revenue collected in the previous three years, adjusted for inflation and population growth.

Rep. Bobby Scott (D-Va.) said these amendments would “make it all but impossible” to pass a deficit reduction plan similar to the 1993 Clinton budget because the supermajority requirement would make it much harder to raise taxes.

“Limiting revenue increases may be a desirable policy for some members but suggesting that it would actually help balance the budget is just absurd,” Scott said.

Douglas Holtz-Eakin, former Congressional Budget Office (CBO) director and president of the American Action Forum, told the committee that the long-term U.S. fiscal outlook is “dire” and some type of rule to bind fiscal policy is needed.

“Such a rule could take the form of an overall cap on federal spending (perhaps as a share of gross domestic product), a limit on the ratio of federal debt in the hands of the public relative to GDP, a balanced budget requirement, or many others,” he said.

Holtz-Eakin said such a rule would force spending, appropriations, mandatory spending, and tax decisions to “fit coherently within the adopted fiscal rule.”

“It would force lawmakers to make tough tradeoffs, especially across categories of spending,” he said. “Most importantly, it would give Congress a way to say ‘no.’ Spending proposals would not simply have to be good ideas. They would have to be good enough to merit cutting other spending programs or using taxes to dragoon resources from the private sector.”

An effective fiscal rule, Holtz-Eakin said, should address the problem of increasing deficits. It should also establish “a direct link between policymakers and the fiscal rule outcome.” Finally, the fiscal rule should be transparent so that the public and policymakers have a clear understanding of how it works.

He said many of the balanced amendment proposals would meet these requirements.

The CBO released last week its long-term budget outlook. Under favorable assumptions, the CBO projects deficits of $7.6 trillion from 2015 to 2024. The U.S. government deficit stood at $680 billion in 2013.

Henry Aaron, fiscal and healthcare expert at the Brookings Institution, said that despite the relatively high levels of current government debt and the budget challenges facing the nation, instituting a federal balanced budget amendment would negatively impact the economy and threaten the nation’s financial stability.

Aaron argued that a balanced budget amendment would become an “automatic destabilizer” during economic slowdowns because it would require tax increases or spending cuts that would intensify unemployment and the fall of GDP.

He listed several reasons why Congress should not pass a balanced budget amendment. First, budget deficits are sometimes beneficial, namely in times of wars and economic slowdowns. Second, requiring a super-majority to raise the debt ceiling or to run a deficit is a “veritable summons to political extortion by an intransigent minority.” Third, a Congress constrained by such requirement would “inevitably resort to all manner of devices” to circumvent the budget limits in ways that led to inefficient government.

“When members of both parties work together, they can limit spending, drastically reduce deficits, and even achieve balanced budgets,” Aaron said. “If sound fiscal policy is what one wants, one doesn’t need a balanced budget amendment to get it.”

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