I have been reading with great interest how the Senate is grappling with a formula to address Sen. Bob Corker’s concerns. The worry is that federal revenues will falter if the economy does not respond as predicted to Tax Reform. If this scenario plays out, a trigger would go into to effect to raise federal revenues to keep the budget in balance and to prevent defaulting to the easy fix -- issuing more Treasury debt.
The federal debt now stands at approximately $20 trillion and the Republicans would like to reduce the level, or at a minimum be in a position to slow the growth. If the economy does not respond in a “Laffer” like way, it may be quite difficult to avoid having to issue more debt. Of course, the alternative is to cut the budget. The most dollars are in the “non-discretionary” categories of Medicare, Medicaid, and Social Security. We know that attempts have been made to trim Medicaid, but, the other categories for the time being appear to be off the table.
I truly believe that our legislators should consult a municipal professional on how to craft a sound trigger mechanism. Remember Al Gore and the lock box. During the presidential debate in 2000, the candidate proposed keeping social security taxes that are collected in a lock box. Along with that suggestion, the candidate proposed using the “surplus” to pay down the national debt. The irony is lock box funds are intended to remain therein. The lock box was even included in a Saturday Night Live skit. There is no doubt that at least part of that idea had its origins in discussions with legislators in his home state -- that is Tennessee, the same state as Senator Corker’s.
In drafting a trigger, a great deal of attention has to be paid to all of the fine points. Bond counsels are adept at drafting sample language in this regard. It is important to make the language simple, clear and direct. Many of our legislators are attorneys and therefor would be quite adept at debating the true meaning and intent of the adopted language for the trigger and how it should work in practice.
First, the conditions precedent to enacting the trigger must be clear. In the first instance, the revenue decline would have to be precise. We would recommend a percentage decline in revenues. I am not certain what the appropriate percentage would be. After all, the federal budget is large at $4.1 Trillion. Even a level of 5% might be quite high. We will leave the right level to Congress.
The next consideration is the definition of “revenues”. Would revenues include the total anticipated in the budget or would it be a carve-out of certain revenues. For example, would revenues just include income taxes or would the carve-out be broader. Whatever the definition of revenues, clarity is key to heading off the need for future deliberations. Another aspect is the vote required to invoke the trigger. In municipals, the trigger is often at 2/3rd’s or something more than a majority.
Once the trigger has been tripped, there is the consideration of what actions must be taken to raise revenue. There is always a hesitation about being very specific about what precise revenues need to be adjusted and to what degree.
I would strongly suggest consulting with officials in California. The state has been very skilled in terms of being precise with the factors that go into a trigger and then how much revenue needs to be adjusted. The state has been particularly clear in this regard with the sales tax over the years. Given the myriad revenues of the federal government, I would strongly suggest a basket of key revenues for the basis of the calculation. What is important is that the basis for the basket of revenues is well understood over the long haul from a yield perspective and from a taxpayer behavior perspective.
Once the trigger is invoked, there is the question of how long the trigger period should last. This could be in years or in dollars. The duration could also be pegged to the ten-year forecast in some respects. In our experience in municipals, a trigger period is not supposed to last for long. We would generally argue for a shorter duration. Given the size and scope of the federal budget, we would argue a trigger period for no longer than two budget years makes intuitive sense. Most post WWII recessions have not lasted for two full years.
After the trigger has been invoked and has run its course, it is time for review and fine tuning. Did the revenue variables as selected as the basis for the trigger perform according to expectation? Should other revenues be substituted in the basket? Were there other exogenous variables that affected the outcome? Other factors to consider would be whether or not the trigger period was sufficient. Do any of the definitions need to be revisted?
Did the trigger essentially work as intended? Another aspect would be whether the tripping of the trigger was a straightforward affair or not. Were there any nuances that previously did not surface that became important in the consideration of tripping the trigger.
We are not suggesting that any of the steps involved in crafting a sound workable trigger are easy. Layer on partisan politics and it becomes much more difficult. However, the pursuit of the goal must remain the key motivator.
The clear alternative is to cut the expenditure side. The challenge with expenditure cuts is always the consideration of how much of the budget is discretionary versus mandated. Across-the-board cuts are problematic at best. There is that special consideration for the payment of debt service that all must be mindful of always. Sequestration has also taught us that across-the-board cuts offend many interested parties.
We may have to leave the full vetting of expenditures cuts to another time. Just to reiterate, we think a trigger at the federal level is an excellent idea if executed properly. Just ask any municipal professional.
