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The 'No New Taxes' PledgePublished: July 12, 2004 || Availability: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. © TAX ANALYSTS. Reprinted with permission. Note: This report is available in its entirety, including all tables, charts and graphs, in the Portable Document Format (PDF). As of June 1, 2004, a "no new taxes" pledge has been signed by President Bush and by 258 members of Congress. Although the pledge is occasionally mentioned in public discussions, its role in current and future tax debates has remained relatively unexplored. The pledge requires its signers to oppose any increase in marginal income tax rates and to oppose any removal of deductions that is not matched by reductions in marginal tax rates. It thus appears to require signers to oppose the expiration of any temporary provision unless it is replaced by a tax cut of equal magnitude. Surprisingly, it does not appear to rule out new taxes on items like energy, consumption, or wealth or increases in payroll tax rates. The pledge has been signed by just less than a majority of members of the House of Representatives. The signers include a majority of the members of the Ways and Means Committee, through which all tax legislation must pass, as well as the Budget and Appropriations Committees. In the Senate as a whole and in the key Senate tax and fiscal committees, substantial minorities have signed the pledge. With these facts as background, the central question we address is how the pledge has affected past efforts and will affect future efforts to balance the budget and control government spending. Put simply, is signing the pledge and following its dictates best interpreted as an act of fiscal responsibility or fiscal recklessness? This question is important because current budget prospects feature large and possibly growing deficits in the medium term and a long-term fiscal outlook that everyone acknowledges is unsustainable. As a matter of arithmetic, these problems can be resolved only through some combination of spending cuts and revenue increases. Many observers, ourselves included, believe that all options should be on the table in efforts to resolve this problem. The pledge takes a different approach: It is clearly intended to constrain the range of possible solutions by removing tax increases from consideration. That is, it adopts the "starve the beast" approach to controlling federal finances — attempting to cut off revenue increases as a way of forcing reductions in spending. Whether this strategy has proven or will prove effective is an open question. We present three pieces of evidence suggesting that following the dictates of the pledge is not consistent with fiscal responsibility. First, since 1981, periods when tax revenues fall (relative to GDP) have been periods when federal outlays rise, even after controlling for the effects of the business cycle. This is the opposite of what a "starve the beast" approach would imply and suggests instead that policymakers go through periods of fiscal responsibility and fiscal restraint, when such actions are taken on both sides of the budget at the same time. Second, in practice, budget rules and legislative agreements have proven effective in reducing spending and balancing the budget only when restrictions are placed on both tax cuts and spending increases at the same time. The no new taxes pledge is intended to prohibit such agreements. Third, direct evidence from voting records is simply not consistent with claims that pledge signers have acted in a fiscally responsible manner. Pledge signers voted almost unanimously in favor of large and permanent tax cuts. Given that pattern, and the fact that they have removed tax increases as a possible solution to fiscal problems, it would be plausible to think that signers have been especially vigilant in guarding against spending increases. The data show, however, the opposite. Six out of every seven signers voted in favor of the Medicare prescription drug bill last fall, the largest entitlement increase in decades. About 80 percent of pledge signers who voted on all of the bills supported all of the recent tax cuts, two proposals to make them permanent, and the Medicare bill. Most of these bills were strongly opposed by nonsigners. Besides supporting the Medicare bill, pledge signers also favored the farm bill in 2001 by a ratio of 3 to 1. Even after three years of falling revenues and increasing spending, three-quarters of the signers who voted supported the recent, pork-laden highway bill in the House. These voting patterns are hard to reconcile with a "starve the beast" theory, because the same people who voted for permanent tax cuts also voted for permanent spending increases, and did so at a time of projections of falling long-term revenues. The voting patterns are also inconsistent with fiscal responsibility. The votes supporting tax cuts, Medicare, and other bills will require massive reductions, detailed below, in other spending to keep federal finances in line if the option to raise taxes is removed. As far as we are aware, no signer has endorsed specific spending cuts anywhere close to the required magnitude. We also examine implications of the pledge for some legislative issues and budget rules. Having all signers follow the pledge would be sufficient to stop the repeal of any of the 2001, 2002, and 2003 tax cuts before they expire as long as President Bush remains in office, but is not sufficient to guarantee the permanent extension of those tax cuts. One proposal to reduce budget gimmickry would require scoring all new temporary tax cuts in the future as if they were permanent. Taking the pledge seriously gives added support to this idea, because almost a majority of Congress has signed on to the view that no temporary provision should ever be removed unless it is replaced by a provision that cuts taxes by at least as much.1 Section I describes the pledge and signers and justifies taking the pledge seriously. Section II examines fiscal responsibility issues. Section III discusses implications of the pledge for some legislative and budget scoring issues. Section IV concludes. Notes from this section 1 As discussed further in section III, this logic leads to rules that are exactly the opposite of the rules that the administration has advocated in its most recent budget. Note: This report is available in its entirety, including all tables, charts and graphs, in the Portable Document Format (PDF). |
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