Washington: Balancing Act

It's been a wacky spring inside the Beltway. The House bank scandal, the voluntary retirements of seven senators and more than 50 representatives, and the Ross Perot noncampaign have already unsettled the comfortable and well-established here. But the biggest surprise may come in June: Democrats may navigate a balanced-budget amendment through Congress.

The amendment, principally sponsored by Sen. Paul Simon (D–Ill.) and Rep. Charles Stenholm (D–Tex.), would both limit Congress's power to run deficits and make it somewhat harder to raise taxes. Before the federal government could run a deficit, a 60-percent majority in both houses of Congress would have to vote for it. And any tax increase would require a roll-call vote, placing legislators on the record; the vote would also have to be by a "constitutional" majority—"aye" votes from more than 50 percent of all members, not just a majority of those present at the time the vote is taken. (Stenholm has 268 cosponsors, Simon, 26; the measure's chief Republican sponsor is Sen. Strom Thurmond of South Carolina.)

But not all of the usual supporters of fiscal restraint back Simon-Stenholm. Some fiscal conservatives see this amendment as a means for big spenders to enact new programs and sock taxpayers with huge new levies. Others who back the amendment admit taxes will go up. But if the government has to live within its means, they argue, spending must eventually come under control.

Among fiscal conservatives, perhaps the most vocal critics of Simon-Stenholm are the U.S. Chamber of Commerce and the National Tax Limitation Committee. Matthew Kibbe, director of federal budget policy for the Chamber, says his organization opposes Simon-Stenholm because "we will get tax increases every year we have a budget crisis."

Kibbe says the Chamber doesn't like deficits but is more worried about the huge chunk of economic activity consumed by government spending. He argues, following economist Milton Friedman, that the deficit has helped limit spending on new programs. Federal spending currently consumes around 25 percent of gross domestic product. If Simon-Stenholm is ratified, Kibbe says, "I can foresee a balanced budget at 40 percent of national income."

The monstrous size of today's deficit and the consequent turmoil rapid budget balancing might cause are also troublesome. In 1990, the last time the House considered a balanced-budget amendment, the deficit was $150 billion. Now it's $400 billion. And Beltway number crunchers project perpetual deficits in the $200- to $400-billion range.

If Washington had to reduce the deficit by $400 billion in one year, National Federation of Independent Business Vice President John Motley says, "fiscal disaster" would result. Personal and business tax rates could soar. Frantic military cuts could sink defense-industry stocks. Short-term interest rates might skyrocket. By a margin of three to one, NFIB members oppose a balanced-budget amendment without limits on taxes. The group hasn't decided whether to endorse Simon-Stenholm or remain neutral.

By contrast, Stephen Moore, director of fiscal policy studies at the Cato Institute, supports Simon-Stenholm without reservations. If it is ratified, he admits, "we'll see tax increases." But as people start to feel the tax bite, he predicts, they'll demand spending restraint.

Moore notes that balanced-budget requirements have kept spending down in state capitals as the recession has slowed the growth in tax revenue. While federal spending has risen by 8 percent each of the last two fiscal years—twice the rate of inflation—state spending rose by 4 percent last year and will probably go up by only 2 percent or 3 percent this year.

To make the transition to a balanced budget less chaotic, Moore predicts, Congress will enact a plan similar to the Gramm-Rudman-Hollings deficit-reduction act. Indeed, Simon told the Los Angeles Times that as state legislatures consider ratifying an amendment—and 38 must ratify, a process most observers think would take five years—Congress "would really have time [to reduce the deficit] in a very systematic way." Even Motley believes that any balanced-budget amendment would force Congress and the White House to attack spending, even on entitlements, immediately after this November's elections.

The organizations that either oppose Simon-Stenholm or that plan to stay on the sidelines haven't given up on a balanced-budget amendment altogether. They support a proposal sponsored by Rep. Joe Barton (R–Tex.), Rep. Billy Tauzin (D–La.), and Sen. Bob Kasten (R–Wis.). This alternative ties tax increases to economic growth: Any tax hike that raises revenue by a percentage greater than the annual increase in GDP must receive a 60-percent majority in both houses. Unfortunately, even the most vocal supporters of the Barton-Kasten amendment know it won't pass, because Congress won't allow its hands to be tied so tightly.

The debate among fiscal conservatives centers on the incentives legislators face. Kibbe and the Chamber argue that when legislators must choose between tax increases on everyone and spending cuts in their home districts, taxes will go up every time. They see a permanent Washington establishment that no amount of taxpayer resistance can shake.

Moore, however, sees a new tax revolt brewing. He believes voters will "throw the bums out" if they perceive a tax burden that's too heavy.

And with congressional approval ratings in the teens, demoralized legislators may do anything—even limit their ability to spend what they don't have—to win in November.

"It's been a crazy year," says Motley. "And it's going to get even more fun."

Rick Henderson is Washington editor of REASON.